What is a Jumbo Mortgage and why are rates higher?

A Jumbo mortgage is a loan amount that is greater than the Conforming loan limit of $417,000.  Jumbo loans require higher down payments along with higher interest rates.  The reasons for this are because higher priced homes are not as marketable as a home that is $417,000 or less and due to the recent real estate crisis there isn’t a secondary market for them. 


What is a secondary market?  It is where loans are bought and sold by banks, Wall Street, and investors.  There are just not as many people looking at homes in the higher price ranges as they are for a home of say $300,000. 


How do they arrive at a number of $417,000 or higher?  The conforming loan limits are determined by the median sales price of a county.  For 2009 if the median sales price for a county is less than $417,000 they will still allow $417,000 as the maximum loan amount.  Broward County Florida’s median sales price is $345,000 which will also be the maximum loan limit on FHA loans starting January 1st, 2009. 


So what are the interest rates on Jumbo Mortgages?  It all depends on how much you will be putting down, your credit score, etc.  Typically you will want to look at a 5/1 ARM (adjustable rate mortgage) or 7/1 ARM which are fixed for 5 or 7 years and adjust there after based upon and index such as the LIBOR and a margin which is fixed.  Rates as of December 12, 2008 on a purchase of a single family home, putting 30% down, with a loan amount no greater than $850,000, primary residence, showing income, 700 plus credit scores, paying no points, on a 5/1 ARM, your rate would be 5.5%.