If a conventional loan falls within Fannie Mae's and Freddie Mac's loan limits, it is referred to as a conforming loan. If the loan amount exceeds the maximum permissible loan amount of these two agencies, it is called a Jumbo (non-conforming) loan. As of 2020, this loan amount stands at $510,400.
Conventional lenders typically insist that the borrower put down more than 20% on a jumbo loan. Interest rates on jumbo loans generally run between .375-.5% higher than Conforming loans. The difference in the interest rate between a Conforming and jumbo loans is higher when mortgage money is not plentiful. The difference typically decreases with the abundance of mortgage money.
Though jumbo loans are less risky for lenders in the sense that borrowers often have stellar credit, they are higher risk because of the very fact that the loans are for such high amounts. This can result in higher interest rates, as luxury homes can be harder to sell at full price after they’ve been defaulted on.
Additionally, refinancing a jumbo loan can be proportionately more expensive because of the higher closing costs, though your NOVA Loan Officer might be able to secure a refinance discount or certain agreements that help you avoid additional mortgage taxes.
If you’re looking to upgrade to a luxury home, contact a local Loan Officer today! They’ll be able to assess your options and make sure you’re aware of all the differences between conforming and non-conforming loans.