Why Jumbo Mortgage Loans are expensive?
Jumbo mortgage loan’s interest rate is higher than other mortgage loans and it has many reasons. Before we move to these reasons, we must understand what is Jumbo Mortgage?
Jumbo Mortgage:
It is a luxury mortgage loan and offered to purchase luxury homes. We can also categories it with loan limit that exceeded prescribe limit. Currently define limit for jumbo mortgage is $417,000 but it varies from states to states like in Hawaii, it is $625,000. This is because; the land prices and construction cost at Hawaii is very expensive.
How Jumbo Mortgage loans are expensive:
- Jumbo mortgage loans are big in size and required some additional working from lenders to secure their risk. Lenders charge higher interest rates to generate high profits and avoid possible risk of loss in case of default.
- There are two main Govt. funded agencies (Fannie Mac & Freddie Mac) both agencies purchases mortgage from small lenders and sell them to different investors. Jumbo mortgage loans are usually bigger in loan size and therefore, investors avoid purchasing these loans. This is because; it would be hard for them to sell these luxury houses in foreclosure and their investment will freeze there.
- Another reason for its expensiveness is that usually lenders when offered junky investments projects like Jumbo Mortgage charge higher interest rate to recover their profit early. This strategy helped them when they go for foreclosure or for refinance.
- The target market for jumbo mortgage is self employed business individuals and high net worth individuals. Lenders know this factor and also understand their repayment capacity. So, they offered competitive rate which is not on higher side but more than normal rates.
Click here to read very interesting article about Jumbo Mortgage.
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