What are jumbo loans?

To understand jumbo loans, you need to understand a little bit about two government-sponsored financial companies - Fannie Mae and Freddie Mac. These two companies buy a tremendous amount of lender-originated loans. This helps keep interest rates down and allows more people to qualify for mortgages. Fannie Mae and Freddie Mac can only purchase loans under a specified amount. Any loan that exceeds this amount is considered a "non-conforming" or jumbo loan. In 2006, for example, the limit was ,000, so if you want to purchase a home that's valued above this amount, you may need to investigate a jumbo loan.

Because jumbo loans can't be funded by Fannie Mae or Freddie Mac, the interest rates are higher, and points may be as well. If you need a loan amount over ,000, consider splitting the loan. Many lenders will split a large loan amount to help borrowers avoid jumbo loans. You would, in essence, take out two mortgages. The first would be for ,000 and the second would be for the difference between the first mortgage and the sale price of your home. While the up front costs are higher, the savings are significant as you're not paying a higher interest rate on the full amount for the full life of the loan.

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