Avoiding A Jumbo Mortgage

Avoiding A Jumbo Mortgage

A jumbo mortgage, also referred to as a non-conforming mortgage, is any mortgage whose amount exceeds limits that are set annually by Fannie Mae and Freddie Mac. Currently, as of 2006, these limits are:

  • One-family loans: $417,000
  • Two-family loans: $533,850
  • Three-family loans: $645,300
  • Four-family loans: $801,950

Please note: 1- to 4-family mortgages in Alaska, Hawaii, Guam, and the U.S. Virgin Islands are 50%t higher than the limits for the rest of the U.S.

Jumbo mortgages typically have interest rates that are higher than conforming mortgage interest rates. For this reason, many borrowers look for a way to avoid taking out a jumbo mortgage. There are two basic strategies to accomplish this:

  1. Put down a large enough down payment so that they may take out a conforming mortgage loan. Many borrowers may not have enough available cash to accomplish this.
  2. Take out a second loan that when added to the down payment allows the borrower to take out a first loan that is under the conforming loan limits.

Example of Using a Piggyback Loan to Avoid a Jumbo Mortgage

An example will go a long way to helping borrowers understand this strategy. For this example assume that the borrower is purchasing a home for $562,500 and that they have a 20% down payment. If they were simply to take out a loan to cover the remaining balance they would take out a $450,000 jumbo loan (see figure 1 below).

Purchase Price:$562,500
Down Payment:$112,500
Loan Needed:$450,000
Figure 1

Using this scenario, if the borrower wanted to avoid taking out a jumbo mortgage they would need to take out a second mortgage to get the amount needed for the primary mortgage down to $417,000. In this instance they would need a second mortgage of $33,000 on top of a primary mortgage of $417,000 (see figure 2 below).

Purchase Price:$562,500
Down Payment:$112,500
Amount to be Financed:$450,000
Primary Mortgage:$417,000
Second Mortgage:$33,000
Total Financed:$450,000
Figure 2

In most cases, the interest on the lower interest for the conforming mortgage will be significantly less than the interest that would have been paid on the jumbo mortgage even after the interest cost of the second mortgage is taken into account.

It should be noted that Fannie Mae and Freddie Mac also have loan limits for second mortgages. As of 2006 these limits are:

  • $208,500
  • In Alaska, Hawaii, Guam, and the U.S. Virgin Islands: $312,750