Deciding whether to go with a Jumbo Mortgage or a Conventional Mortgage one can be confusing. Both have their own advantages and disadvantages, and it can be hard to decide which is the best option for you.
In this personal finance guide, we will compare the two options and look into the pros and cons of each. By the end of this article, you should have a good idea of which mortgage is right for you!
Jumbo Mortgage Vs Conventional Mortgage Table of Contents
What is a Jumbo Mortgage?
A Jumbo Mortgage is a mortgage that exceeds the loan limits set by government-sponsored entities like Fannie Mae or Freddie Mac.
In most parts of the country, a jumbo loan limit is $417,000 for a single-family home. But in some high-cost areas, the limit may be as high as $625,500.
What is a Conventional Mortgage?
A conventional mortgage is a home loan that isn't backed by the federal government. There are two types of conventional loans: conforming and non-conforming loans.
A conforming loan simply means the loan amount falls within maximum limits set by Fannie Mae or Freddie Mac. These maximums vary by county. For example, the limit in San Francisco is $625,500.
What is The Difference Between a Jumbo Mortgage and a Conventional Mortgage?
The main difference between a jumbo mortgage and a conventional mortgage is the amount of money that is being borrowed.
A jumbo mortgage is a loan for an amount that exceeds the conforming loan limits set by Fannie Mae and Freddie Mac. In most cases, this means that the loan is for more than $417,000. A conventional mortgage, on the other hand, is a loan for an amount that falls within the conforming loan limits.
There are a few other differences between jumbo mortgages and conventional mortgages, but the amount of money being borrowed is the most significant.
Because of this, jumbo mortgages usually have higher interest rates than conventional mortgages. They also often require a larger down payment, and they may have stricter qualifying criteria.
What Are The Different Types of Jumbo Mortgage?
There are two types of jumbo mortgage available, each with their own set of pros and cons. The first is a fixed rate mortgage, where the interest rate stays the same for the entire loan term.
This offers stability and predictability, making it a good choice for those who want to avoid any potential rate hikes down the road. The downside is that you may end up paying more interest over the life of the loan if rates go down.
The second type of jumbo mortgage is an adjustable rate mortgage (ARM). With this type of loan, the interest rate can fluctuate based on market conditions.
This can make it a good choice for those who are looking to get the lowest rate possible. However, it's important to be aware that your payments could go up if rates rise.
What Are The Different Types of Conventional Mortgage?
There are three different types of Conventional Mortgage. They are:
Fixed Rate Mortgage
A fixed rate mortgage has the same interest rate for the entire term of the loan, typically 15 or 30 years. The monthly payment is also fixed, so you know exactly how much you will be paying each month. This makes budgeting easy and gives you the peace of mind that your payments will never go up.
Adjustable Rate Mortgage
An adjustable rate mortgage (ARM) has an interest rate that is fixed for a certain period of time, usually five or seven years. After that, the interest rate can change, typically once per year. The monthly payment also adjusts up or down, depending on the new interest rate.
A balloon mortgage has a lower interest rate for a certain period of time, usually five or seven years. At the end of that period, the remaining balance is due in full. This type of mortgage can be beneficial if you expect to have a higher income in the future or if you plan to sell the property before the balloon payment is due.
What Are The Advantages of a Jumbo Mortgage?
There are a few key advantages that a jumbo mortgage offers over a conventional mortgage.
The first is that you'll likely have a lower interest rate. This is because jumbo mortgages tend to be backed by higher-quality collateral than conventional mortgages, so lenders see them as less of a risk.
Another advantage is that you'll likely have more flexible terms. This means that you can choose a repayment schedule that best suits your needs.
Finally, jumbo mortgages typically come with fewer restrictions than conventional mortgages. This means that you'll have more freedom when it comes to things like home equity lines of credit and other borrowing options.
What Are The Advantages of a Conventional Mortgage?
Conventional mortgages offer a few key advantages when compared to their jumbo counterparts. For one, conventional loans are not restricted by loan size limits, meaning you can borrow as much money as you need to finance your home purchase.
Additionally, since conventional loans are not backed by the government, they typically come with lower interest rates and stricter eligibility requirements.
Finally, conventional loans offer more flexible repayment terms than jumbo loans, giving you the option to choose a shorter or longer loan term based on your financial needs.
What Are The Disadvantages of Jumbo Mortgage?
- You may have to pay private mortgage insurance (PMI) with a conventional loan if you make a down payment of less than 20%
- Jumbo Mortgage rates are usually higher than Conventional Mortgage rates
- You may have to get your jumbo loan through a portfolio lender, which could mean more paperwork and stricter qualifying standards
What Are The Disadvantages of Conventional Mortgage?
There are some potential disadvantages to taking out a conventional mortgage, such as:
- You may have to pay Private Mortgage Insurance (PMI) if you put down less than 20% when you purchase your home.
- Your interest rate may be higher than with other types of loans, such as an FHA loan.
- You may have to pay for mortgage insurance if your down payment is less than 20%.
So, Which One Should You Use?
The answer to this question really depends on your personal financial situation. Both options have their pros and cons, so it's important that you evaluate your own needs before making a decision.
If you're looking for the lowest possible interest rate, then a conventional mortgage is probably the way to go. However, if you're self-employed or have a low income, you may struggle to qualify for one of these loans.
A jumbo mortgage can be a good option if you're looking to borrow a large amount of money. However, you will likely need to have excellent credit in order to qualify for the best rates.
At the end of the day, it's important that you choose the option that is best for your own personal financial situation. Be sure to speak with a financial advisor if you need help making this decision.
What Are Some Alternatives to Using a Jumbo Mortgage or a Conventional Mortgage?
If you're looking for alternatives to using a jumbo mortgage or conventional mortgage, there are a few options available.
One option is to get a government-backed loan, such as an FHA loan or VA loan. Another option is to get a portfolio loan from a private lender.
Finally, you could try to get financing through a home equity line of credit. Each of these options has its own set of pros and cons, so be sure to do your research before deciding which one is right for you.
What Are Some Tips For Using a Jumbo Mortgage?
If you're looking to take out a jumbo mortgage, there are a few things you can do to increase your chances of being approved. First, make sure your credit score is as high as it can be. Lenders will often require a higher credit score for borrowers taking out a jumbo loan than they would for someone taking out a conventional mortgage.
Another tip is to make a larger down payment than you would for a conventional loan. Jumbo loans often require borrowers to put down at least 20% of the purchase price, so making a larger down payment can improve your chances of being approved.
Finally, be prepared to provide documentation of your income and assets. Lenders will often require borrowers taking out a jumbo loan to provide more documentation than those taking out a conventional mortgage. So, if you're planning on applying for a jumbo mortgage, make sure you have all your financial documentation in order before you start the application process.
Applying for a jumbo mortgage can be a bit of a challenge, but if you have good credit and are prepared to provide documentation of your income and assets, you should be able to get approved. Just make sure to compare rates and terms from multiple lenders before you choose a loan.
What Are Some Tips For Using a Conventional Mortgage?
There are a few things to keep in mind when using a conventional mortgage:
- Make sure you shop around for the best interest rate. This can save you thousands of dollars over the life of your loan.
- Be aware of the different types of fees associated with a conventional mortgage. These can include origination fees, points, and private mortgage insurance (PMI).
- Be sure to compare a conventional mortgage with other loan options, such as an FHA loan or a VA loan.
- Make sure you are comfortable with the terms of your conventional mortgage. This includes the interest rate, repayment schedule, and any prepayment penalties.
If you're thinking of using a conventional mortgage to finance your next home purchase, these tips can help you make the best decision for your needs. Talk to your lender about all of your options and make sure you understand the pros and cons of each type of loan before making a final decision.