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Home buyers can select from a great variety of mortgage loans. The jumbo loans allow you to borrow more money for buying a luxury home. Traditionally, they have been reserved for the very wealthy only, but now they are becoming more accessible to the average home buyer. Find out more about them to decide whether such a loan will match your needs, requirements and budget.

Loan Features

A jumbo mortgage is any home loan with principal over $417,000 in most parts of the US. In areas with predominantly high-value properties, the principal is over $625,000. Basically, if you want to get more financing for purchasing a luxury residence, this is the loan which you need to go for. In general, there is no upper limit. It is possible to borrow more than $1 million and even more than $2 million.

The interest rate is similar to the rate on a conventional loan of the same type and with the same term. The difference is often no greater than 0.5 percentage points in either direction. However, in the past few years, the jumbo loans have been having lower interest rates than their conventional counterparts. Even a rate which is less than 0.5% lower can save you quite a lot of money.

Another important thing to note is that the trend is for jumbo rates to remain pretty much the same in 2014 and 2015. Any significant rise is not expected. The interest rates on conventional loans, however, are projected to increase considerably. In this situation, borrowing more money may turn out to be cheaper in the long term.

Loan Options

You can select from fixed-rate and adjustable-rate jumbo mortgages. It is expected that the gap between the fixed rate and the adjustable rate will increase. This means that the adjustable-rate loans will be more attractive. Still, as a borrower, you have to evaluate carefully the higher risk associated with them.

You can select from different terms as well. The 15-year and 30-year loans are the most popular. When you select the term, you have to keep in mind that a shorter term will results in a cheaper loan with higher monthly payments and vice versa. Consider your repayment and homeownership plans to make the right decision.


In order to qualify for a jumbo mortgage, the monthly payments should not be greater than 33% of your gross income. Hence, you need to have sufficiently high income to be able to afford a bigger loan. The debt-to-income ratio requirement is the same as for conventional home loans. Your DTI should not exceed 43%. The lower it is the better. Some lenders may allow slightly higher DTI, but in this case they require that you have cash reserves for monthly payments plus taxes and insurance payments for a year and a half.

You have to have a credit score of at least 720 to qualify for such a loan. Lenders are willing to approve applicants who can make down payment lower than 20%. It is possible to get a jumbo loan with a down payment of 15% and even 10%, but in such cases you will most likely have to get mortgage insurance.

Weigh the pros and cons of a jumbo mortgage carefully to make up your mind.

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There are various strategies which you can use for managing your mortgage. Many people choose to repay their home loan early. This option can save you a lot of money, but this is just one side of the coin. Find out more about prepayment and its specifics to decide whether it will be the right strategy for you.


When you pay off your mortgage early, you save on interest. This is because interest will be charged for a shorter period of time. You can calculate how much you will save exactly by multiplying the monthly interest amount by the number of months during which you will not have to make such a payment. In most cases, the savings are considerable.

With prepayment, you will have peace of mind that even if bad things happen to you in the future, your house will not be at risk. Additionally, you will own the house fully and this will give you a large equity amount, which you can use to get cheap financing. You can get a home equity loan to finance pretty much anything from improvements to the house to the college education of your children.

Restrictions and Penalties

Many lenders actually make mortgage prepayment more challenging and costlier for the borrower. This is because when they initiated the home loan, they planned a set profit. If this profit is lower, they lose money. As a result, many lenders set restrictions to how much extra money you can add to your installment every month.

Some lenders charge prepayment penalty fee as well. This fee is typically a percentage of the loan's principal amount. Often, the percentage is lowered as the term of the loan advances. There are also lenders who set a very high penalty fee if the loan is prepaid before a certain period of time passes. This period is usually five years.

In general, if you consider using a strategy for paying off your home loan early, you have to check the prepayment terms and conditions in the mortgage agreement very carefully before signing it. If these will prevent you from implementing it or from deriving the expected benefits, there will be no point in using it.

Individual Factors

Even if you will save considerably with mortgage prepayment, you have to be certain that you will be able to pull it off and that it does not interfere with your other financial plans. If you need to save money for covering future expenses which will come well before the expected date of early repayment, then this option may not be right for you. Similarly, if you have to put up with great budget restrictions in order to pay off the loan early, you may not get very far.

The Alternative

You should definitely consider the main alternative to this option which is refinancing. Refinancing can be the better solution. If you are able to secure a lower interest rate on the new loan, you will not only save money but enjoy lower monthly payments. This will leave more cash in your pocket. At the same time, the cost of refinancing can be fairly high and this may reduce the potential savings.

The best way to decide whether mortgage repayment is a good idea is to analyze the numbers.