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MORTGAGE KNOWLEDGE CENTER

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JUMBO LOANS

Rates starting at % (APR %)¹

 

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  1. Home
  2. Mortgage Knowledge Center
  3. Is a Jumbo Loan Right For You

MORTGAGE

Is a Jumbo Loan Right For You?

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

EXPECTED READ TIME: 9 MINUTES

Updated December 15, 2022

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 2023 is $726,200.

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.

SIMILAR ARTICLES

Understanding Jumbo Loan Rates | PenFed Credit Union

Jumbo loan interest rates can vary based on credit, income, down payment or equity, and property type. Learn how to get the best jumbo loan interest rates.
jumbo loan rates

What Is a Jumbo Loan? | PenFed Credit Union

Find out the basics of a jumbo loan. For example: How big is a jumbo mortgage? What are the pros and cons? And how do you apply for a jumbo loan? Knowing these answers is helpful.
single-family houses in a row in a neighborhood

How Is a Jumbo Loan Different than a Conforming Loan? | PenFed Credit Union

Jumbo loans make luxury homes a reality. Read on and find out what a jumbo loan is, what makes a mortgage jumbo, and what the benefits of a jumbo loan are.
young girl running in big house

Top 10 Benefits of a Jumbo Loan | PenFed Credit Union

There are huge advantages of getting a jumbo loan including purchasing a nicer home in a great neighborhood. Find out if a jumbo mortgage is right for you.
jumbo loan mortgage papers
image

JUMBO LOANS

Rates starting at % (APR %)¹

 

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

Home Buying Steps

  • Getting Started
  • Finding a Home
  • Getting a Mortgage
  • Home Ownership

Mortgage Topics

  • VA Loans
  • Conventional Loans
  • First Time Homebuyer
  • Home Equity
  • Homebuying 101
  • Checklists
  • Adjustable Rate Mortgages
  • PenFed Top 10
  • Refinance
  • Jumbo Loans
  • FHA
  • Videos

Mortgage Products

  • Mortgage Center
  • Refinancing
  • Home Equity

PenFed HELOC

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

Disclosures

1Except for holidays, rates are updated Monday through Friday 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.

*Prime Rate is % as of . The APR for this Home Equity Line of Credit (HELOC) is based on prime plus a margin and can change monthly. Fixed Rate Advances will be amortized over the Fixed Rate Advance Term, with the payment consisting of principal and interest. Your Annual Percentage Rate for a Fixed Rate Advance will be calculated by adding your Prime Rate, your Margin, and the Additional Fixed Rate Lock-In Margin. Your Annual Percentage Rate for a Fixed Rate Advance shall not exceed 18% and shall be equal to or greater than % for primary residences and second homes.

  • Annual Fee: Notwithstanding the foregoing, an annual fee of $99 will be assessed on each account anniversary.
  • Home equity lines of credit (HELOC) are variable rate loans and the interest rate is subject to increase after consummation of the loan on monthly basis. Closing costs range between $500 and $8,500 for credit lines of $500,000. Contact a representative for additional details.

Appraisals: PenFed will attempt to establish value via an independent method. If that method is unsuccessful, or the value is not sufficient for the amount requested, an appraisal will be required regardless of CLTV. An appraisal is always required in the following circumstances:

For all loans with a loan amount greater than $400,000.

If an appraisal is required, it must be ordered by PenFed. You will be contacted for authorization and payment prior to ordering. Appraisal fees average $550 to $850 (some run higher).

  • Closing Cost Credit: PenFed will pay most closing costs associated with a home equity line of credit (HELOC), which includes credit report, flood certification, settlement/closing, property ownership and encumbrances search, recording, property search, and quick close. Member is responsible for any city, county, and/or state taxes if the subject property is located in FL, LA, MD, MN, NY, TN, or VA. If an appraisal is required, the member, who is responsible for the fee whether or not the loan closes, will pay the cost.

Interest may be tax deductible, consult a tax advisor for further information regarding the tax deductibility of interest and charges.

Fixed Rate Advance Lock-In You may lock in an Annual Percentage Rate for Advances during the Advance Period. During your Advance Period, you may choose to have three separate Fixed Rate Advances locked in at any one time, with a maximum of two new Fixed Rate Advances per calendar year. Each Fixed Rate Advance must equal or exceed Ten Thousand Dollars ($10,000.00) and you may not request a Fixed Rate Advance that would cause the amount you owe to exceed your Credit Limit. The only term option for your Fixed Rate Advance is 240 months (“Fixed Rate Advance Term”). However, the term of your Fixed Rate Advance cannot exceed your Repayment Period.

Fixed Rate Advances will be amortized over the Fixed Rate Advance Term with the payment consisting of principal and interest. Your Annual Percentage Rate for a Fixed Rate Advance will be calculated by adding your Prime Rate, your Margin and the Additional Fixed Rate Lock-In Margin. Your Annual Percentage Rate for a Fixed Rate Advance shall not exceed 18% and shall be equal to or greater than % for primary residences and second homes and 4.75% for investment properties.

Property Insurance: Property insurance is required.

Multiple PenFed Loans: Multiple PenFed Equity loans and HELOCs are available as long as the member and collateral qualify (except Texas). For Equity loans and HELOCs the total indebtedness cannot exceed $500,000 for all PenFed Equity and HELOCs combined.

PenFed does not lend on:

  • Mobile homes
  • Co-ops or time-shares
  • Properties that are currently listed on the market for sale
  • Commercial property or property used for commercial purposes, even if a residence is part of the property
  • Undeveloped property (land only)
  • Properties with more than 4 units

Properties that are currently under major construction/renovations: Property must be fully livable, with no safety issues. (Examples: no missing rails from stairs/decks, no open walls with wires showing, missing kitchen appliances/counters, missing bath fixtures or unfinished pool).

  • Additional limitations may apply

Home Equity Line of Credit:

  • This Account has a Draw Period of 10 years, followed by a repayment period of 20 years.
  • If only minimum payments are made during the draw period, the loan balance will not decrease.
  • In Texas, the maximum CLTV available is 80% on owner occupied properties. Additional restrictions apply in Texas, so please ask a representative for details.
  • In all other states, the maximum CLTV is 85% on owner occupied properties and second homes. Additional restrictions or requirements may apply based on application characteristics.
  • Property type of Condo has a maximum CLTV of 80%.
  • The maximum CLTV available is dependent on credit qualification.
  • Rates vary depending on owner occupancy and CLTV and other loan criteria.

Minimum Loan Amount Requirements in all States:

  • For an owner occupied property or second home the minimum loan amount is $25,000 and the maximum amount is $500,000 with a CLTV of 85% or less of the fair market value.

Other terms and conditions apply; call 844-918-4307 to speak with a representative for details. All rates and offers are subject to change without notice. To receive advertised product, you must become a member of PenFed.

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This credit union is federally insured by the National Credit Union Administration. Rates are current as of September 2023 unless otherwise noted and are subject to change.

APY = Annual Percentage Yield
APR = Annual Percentage Rate


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The content you are about to view is produced by a third party unaffiliated to Pentagon Federal Credit Union. PenFed takes no responsibility for the content of the page.


IMPORTANT NOTICE

You are leaving PenFed.org and entering a third party site. PenFed Realty, LLC is wholly owned by PenFed and this referral may provide PenFed a financial or other benefit.


For more information about the relationship between PenFed and PenFed Realty, LLC, see the Affiliate Business Arrangement Disclosure.


IMPORTANT NOTICE

You are leaving PenFed.org and entering a third party Website.


The content you are about to view is produced by a third party website that is unaffiliated to Pentagon Federal Credit Union. PenFed takes no responsibility for the content of the page.


IMPORTANT NOTICE

You are leaving PenFed.org and entering a third party site. PenFed Title, LLC is wholly owned by PenFed and this referral may provide PenFed a financial or other benefit.


For more information about the relationship between PenFed and PenFed Title, LLC, see the Affiliate Business Arrangement Disclosure.


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