A jumbo loan is a mortgage that exceeds the conforming loan limits set by Fannie Mae and Freddie Mac. The conforming loan limit for the year 2020 is $510,400 for a single-family home. Some high-cost counties, including Orange County and Los Angeles County, have a high balance conforming loan limit of $765,600.
Interest rates tend to be competitive for jumbo loans, typically slightly higher than conforming rates. However, in rare cases, jumbo rates can actually be lower than rates offered for conforming loans.
Due to the Dodd-Frank Act, jumbo loans go through more scrutiny than they did in the past. This bill requires mortgages meet certain terms to be considered a Qualified Mortgage. A jumbo loan with a smaller payment but a large balloon payment at the end of the term, are not qualified; nor are interest-only jumbo loans. That means these jumbo loan options are much harder to find, but jumbo loans as a whole are safer for consumers.
Most jumbo loans are adjustable-rate mortgages (ARMs), and fixed-rate jumbo mortgages are hard to come by. This is because banks typically keep jumbo loans on their books, as they cannot sell them to Fannie Mae or Freddie Mac. Banks use their customers' deposits to pay for the loans. Because interest rates on deposits are very low now, banks can make a good profit on jumbo loans even when they offer borrowers a low mortgage rate. Still, deposit rates will rise someday soon, so banks feel more comfortable offering jumbo ARMs.
Some jumbo loans are also referred to as Super Jumbo Loans, which refers to loans above $650,000, possibly reaching $20 million or more.
New legislation has also created something known as a conforming jumbo loan, which ranges between $417,001 and $625,500 for a conventional loan, and $417,001 to $729,750 for an FHA loan.
Some borrowers may wish to avoid a jumbo loan by breaking up a home loan into a first mortgage and a second mortgage. In this case, make sure your combined rate is cheaper than the rate you would have received with a jumbo loan.