Jumbo Loans: Risks and Dangers

Jumbo loans is a term used to describe those mortgages that are well above the Fannie Mae and Freddie Mac federal loan limitations. The limitations are set each January, and they vary based on market conditions and average home prices. For an individual to seek a loan larger than the limit, he or she will need to go to a lender willing to provide a jumbo loan. Most standard lenders will consider these large loans for those individuals who qualify based on their financial stability. Even if you qualify, though, a jumbo loan comes with many risks to consider before signing the contract.

High Monthly Payments

The biggest risk with a jumbo loan is you will not be able to meet the extremely high monthly payment fees. When you are paying off a loan greater than $500,000, you will have to pay a large chunk of your monthly income toward your mortgage. Beyond this, interest rates on jumbo loans tend to be higher because the loans pose more risk for the lender. Most individuals who seek jumbo loans have a high salary but low liquidity to make a down payment. If this describes your position, consider what would happen if you lost your job. While the risk may be minimal, it is still a risk. Do you have the cash saved to continue to make your payments even if you lose your job? Experts say should have at least three months' salary saved. However, if you are in a jumbo loan situation with high interest rates and high monthly payments, you may need six months' saved in order to keep yourself safe. 

Lengthy Payoffs

Even though you will pay a substantial sum each month toward the principal of the loan, you are chipping a way at a huge amount of cash. Most jumbo loans are arranged on 30-year loan terms. This means you will be in debt well into your adulthood regardless of when you are taking the loan. People who choose jumbo loans have reason to believe they will be in the home for a significant amount of time. To these purchasers, it makes more sense to have one pricey loan than to buy and sell multiple homes alone the way. If you do choose to leave before you have built enough equity in your home, however, it will be essential for you to sell you home quickly and at close to the asking price. Otherwise, you could end up losing money in your home purchase.

Strict Loan Terms

Lenders need to protect themselves against the risk of possible refinancing or modification on your part. Because you will have the loan for so long, you may decide it is in your best interest to change the terms somewhere down the line. This usually occurs when interest rates go down or your financial situation improves. To protect against this risk, lenders will offer very strict loan terms and high origination fees. This makes seeking the loan in the first place expensive and modifying the loan later on additionally very pricey. You should not accept the terms of a jumbo loan based on the assumption you can easily change them in the future once your situation or the economy improves. Choose your loan as if you will be stuck with these terms for the entirety of the loan cycle.