What you need to know about jumbo loans

For many people in parts of the country where the median price of a home is extremely high or few affordable homes are available, a jumbo loan may be their only option for homeownership. Also called a non-conforming loan, this type of financing is common in California and East Coast metropolitan areas with skyrocketing real estate values.

A non-conforming loan is called so because it does not conform to the mortgage lending limits set by Fannie Mae (The Federal National Mortgage Association) or Freddie Mac (The Federal Home Loan Mortgage Corp.). These government-sponsored organizations help make sure home loans are available by investing throughout the United States. Neither Freddie Mac nor Fannie Mae will underwrite a jumbo loan.

Jumbo loans work best for homebuyers who want to finance expensive properties and can pay larger monthly payments Non-conforming loans are also favorites of real estate investors because they can better leverage their assets.

Each year, Fannie Mae and Freddie Mac set a limit for conforming loans. In 2004 it is $333,700. Loans over that amount are more risky to lenders, since they are not underwritten by the two organizations. That means jumbo loan interest rates are almost always higher than conventional mortgage rates.

Some non-conforming loans only cover the interest on the mortgage. These are common in parts of the country with extremely high real estate prices. The homebuyers never accrue equity in their purchase.

The higher interest rate can make a big difference if your home is just over the $333,700 limit. Homebuyers in this situation may want to see if they make a bigger down payment to put the home under the conforming limit or even look for another home.

Some mortgage lenders have a Super Jumbo Mortgage product is for mortgage loans over $650,000. They can be fixed-rate mortgages or even “Interest Only” loans.