When financing luxury homes in Cleveland or homes located in a higher-cost area, a jumbo loan is typically the program of choice. Conventional or “Conforming” loans are those that conform to underwriting guidelines set by Fannie Mae or Freddie Mac. If an individual loan meets these requirements, the loan is then eligible for sale in the secondary market, allowing the lender to make still more loans.
One of the requirements is the maximum loan amount. Today, in most parts of the country like Ohio, the maximum conforming loan limit is $766,550. In higher-priced locations like California, the conforming loan limits can be as high as $1,149,825. If a loan amount exceeds these limits it is then labeled a jumbo loan.
Jumbo loans are typically a bit more difficult to qualify and require a larger down payment. Because there is no private mortgage insurance or PMI, most jumbo programs are limited to 80% of the value of the property. However, there are newly expanded options that permit financing up to 95% loan to value. The new low down payment Jumbo mortgages offer more flexibility for buyers who want to retain cash or have equity tied up in an existing property.
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One popular way for borrowers to finance a higher end home without a 20-25% down payment and still avoid PMI is to utilize two loans instead of just one to finance the purchase. In this fashion, the first mortgage is kept at or below 80% of the value with a second lien on the property for the difference between 80% and the amount of the down payment. If the buyers make a 10% down payment, the loan is referred to as an 80-10-10. With a 5% down payment, it’s an 80-15-5.
Another popular financing option is an adjustable-rate mortgage but with a twist. Jumbo borrowers can apply for a “hybrid” loan. A hybrid loan is indeed an adjustable-rate mortgage or ARM, but the interest rate is fixed for a predetermined period. This period is anywhere from three to ten years and is listed as a 3/1, 5/1, 7/1, and 10/1. With a 3/1 hybrid, the rate is fixed for three years before turning into a loan that can adjust once every six or twelve months, depending upon whatever is written into the note.
A hybrid mortgage is a popular choice because the initial rate will be slightly lower than the current fixed rate. Again, not by a lot but lower nonetheless.
There are also 1-year ARMs as well as six-month ARMs. The start rate on these loans will be even lower than a hybrid with many programs offering a lower “teaser” rate for the first six or twelve months. When it’s time for the loan to adjust at its predetermined time, a margin is added to the loan’s index. The result is the rate the borrowers will pay until the next adjustment period.
Each adjustment is also accompanied by a “cap” which limits how much the rate can change compared with the previous rate. This is a form of a consumer protection feature to make sure there are no wild swings in payment from one adjustment to the other.
Finally, borrowers can select a fixed-rate jumbo loan. Fixed-rate jumbo loans will be higher than hybrids or ARMs. The attraction however with a fixed-rate loan is not as much the rate but instead not having to worry what the rate will eventually adjust to at some point in the future. Borrowers can more easily plan for return and manage their finances easier knowing the mortgage payment will never change throughout the life of the loan. The most popular fixed-rate jumbo loan is the 30-year term but lenders can also offer other terms such as 10 or 20 years.
Serving buyers throughout Ohio including Cuyahoga County – Cleveland.