PenFed Mortgage with Confidence


Is a Jumbo Loan Right For You?

What you'll learn: The advantages and disadvantages of jumbo ARMS.


Now that prices for homes have climbed throughout the pandemic, and even more with the rising Conforming loans: Mortgages that are backed by either Fannie Mae or Freddie Mac. If the borrower defaults, then the lender will be repaid by the government. inflation, buyers are looking at purchases utilizing jumbo loans. Like conforming mortgages, jumbo loans come in several varieties, including adjustable-rate mortgages (better known as ARMs). Jumbo ARMs have several pros and cons, and we’ll go over them with you here. Let’s get to it!

Jumbo ARMs Qualifications

Similar to any other adjustable-rate mortgage, a jumbo ARM has an interest rate that will fluctuate after a predetermined amount of time. For example, a 5/1 ARM will have you paying a fixed interest rate for the first five years of your mortgage. From year six on, you will have a rate that will adjust every year. For the borrower, the main difference between a conventional ARM and a jumbo ARM is that a jumbo ARM’s value exceeds the conforming loan limits that are set by Fannie Mae and Freddie Mac. Each county has its own maximum loan limits, but the baseline conforming loan limit for 2022 is $647,200.

When you go searching, you will often find that jumbo ARMs will offer lower interest rates than conventional 30-year mortgages. However, they are more difficult to qualify for than a conforming loan due to their size. Some typical qualification guidelines for jumbo ARMs include the following:

  • The typical down payment required is 20%, but it can range from 15-30%. A down payment of 20% or more means you won’t need to pay private mortgage insurance.
  • The monthly mortgage payment should be less than 38% of your pretax income. And your debt-to-income ratio should be 43% or less. Many lenders require a maximum DTI of 36%.
  • You should have a minimum credit score of 680.
  • You will be required to provide key financial documents, such as:
    • Proof of income.
    • Proof of liquid assets (lenders will usually want to see that you have sufficient assets to pay for six months’ worth of mortgage payments).
    • Proof of ownership of nonliquid assets.

What Are the Advantages of Jumbo ARMs?

There are several advantages of jumbo ARMs, but the reduced cost is the most significant factor. This includes:

  • Rates for ARMs can be 1% (or more) less than rates for a fixed-rate mortgage. This means monthly mortgage payments could be reduced by $500 or more, depending on the size of the loan. Jumbo ARM rates can be lower than their conforming mortgage counterparts because their requirements are more stringent (the 20% down payment, higher credit scores and six-months’ cash reserve). Therefore, the loan is considered less risky.
  • Either a more expensive home can be purchased for the same monthly payment or the payment can be reduced with an ARM.
  • Borrowers can avoid having to break their full loan amount into multiple mortgages and instead keep in a single mortgage.
  • Oftentimes, the original lenders will not sell many ARMs like they will with conforming loans. As a result, these mortgages can have guidelines and prices defined by the lender — not the wholesale mortgage buyers they would be selling to. This can mean that jumbo ARMs have unique loan features beyond adjustable rates, like interest-only repayment terms.
  • With ARMs, borrowers can take advantage of falling rates without needing to refinance.  This saves on new closing costs, and borrowers will see their rates fall automatically.
  • The fixed-rate period of an ARM can vary, usually from 3-10 years, but other terms are possible.
  • .Because, on average, most buyers move within seven years of their purchase, they will rarely have to deal with a rate adjustment and will financially benefit during the fixed-rate period by choosing the ARM. 

What Are the Disadvantages of Jumbo ARMs?

While the loan rates for many ARMs are lower, some borrowers may be charged higher rates.  Because the loan is not backed by Fannie Mae or Freddie Mac, it poses an increased risk to lenders. This risk can result in rates that are 1-2 percentage points higher than the rates of a conforming loan. However, a jumbo ARM can be refinanced when its balance has been paid down below the maximum Fannie Mae and Freddie Mac conforming loan limit.

Jumbo loans almost always have tighter underwriting requirements, minimum down payments, and a lower maximum on your debt-to-asset ratio along with higher financial reserve requirements.

Lenders for jumbo ARMs may require an additional appraisal. This second appraisal is intended as a confirmation to the mortgage lender that the property’s market value is correct.

Jumbo ARMs vs. Fixed Rate

To determine which is better, we need to look at the pros and cons of a fixed-rate mortgage.

Fixed-Rate Mortgage Pros:

  • Your rate and payment will stay constant over the life of the loan, which allows for easier budgeting and expense management.
  • They are simple to understand and there are no surprises that can come up in the future.

Fixed-Rate Mortgage Cons:

  • If interest rates fall, borrowers are better off refinancing, but they must pay refinancing fees and go through a second loan approval and closing process.
  • Interest could cost more over the loan’s lifetime, especially if rates are high at the time of purchase.
  • Loans are nearly identical between lenders, so there is little room for customization.  

Especially for buyers who know they will move within 10 years of their home’s purchase; an ARM will make more sense and save them money over the life of the loan. When rates are on the rise, the decision becomes more difficult because the rate and payment when the fixed-rate period ends will almost definitely be higher than if a fixed-rate mortgage was chosen.

You Decide — Is a Jumbo ARM Right for You?

If you are searching for a dream home and the price exceeds the conforming loan amounts, an ARM may be the best way for you to get into that home. If you have good credit and meet the other requirements, you can find rates that are much more favorable, and you can save hundreds a month on your mortgage payment. If you have found your dream home and know you will stay in it for decades to come, and rates are currently low, then you are likely better off going with a conventional jumbo loan. The choice is yours; however, we have professionals ready to help you make an informed decision.

There are many advantages to jumbo ARMs and a few things to be aware of too. But this type of loan could be just what some homebuyers need to get into the home of their dreams.



Rates starting at % (APR %)¹


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Rates as Low as % APR with flexible use of funds

Apply before becoming a member.

After your application, we’ll help you:

1. Discover you’re eligible to become a PenFed member

2. Open a Savings/Share Account and deposit at least $5


1Rates are updated daily at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on discount point, which equals percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, non-conforming, fixed-rate loan. Loan amount of $1,009,000; loan-to-value ratio of 70%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.