Pros and Cons of Getting a Second Mortgage to Avoid Jumbo Mortgage Loan Rates
The Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Fannie Mae and Freddie Mac, respectively, subsidize the real estate mortgage market by buying mortgage loans originated by edges and other lenders. However, these government sponsored entities (GSEs) are unprotected to maximum loan amounts (e.g., $417, 000 for a single-family home). Loans up to these limits are considered conforming loans. “Any loan over that amount is considered either a jumbo or a super-jumbo loan,” explains Steve Litten, president of Home Security Mortgage in Fredericksburg, Virginia. However, traditional loans can be either conforming or non-conforming loans (jumbo and super jumbo loans). Jumbo loans run between $417,001 and $650,000. Loans above $650,000 are super jumbo loans.
Jumbo loans offer attractive features, including fast closings, no points, no private mortgage insurance (PMI), no lender fees, and already interest-only new home loan mortgages. The dominant disadvantage of jumbo loans is that they carry higher interest rates and points than conforming loans. It’s generally harder to qualify for jumbo loans due to inconsistent underwriting requirements and increased lender risk. Larger down payments may also be required for jumbo loans. Also, PMI is permanent. Once your house builds the necessary equity, you can request that the lender stop charging you for PMI (if it doesn’t automatically drop off). In some areas, it may take less time than you think due to fast appreciation.
You can avoid a jumbo loan by taking out a piggyback loan (1st and “piggyback” 2nd mortgage). Similar to jumbo loans, there’s no PMI with the piggyback 2nd mortgage. The advantages of two loans are that your interest rates and points could be lower than for a jumbo loan, depending on your FICO score and other factors. Qualification is a little easier, too. Also, because the loans generally are by the same lender and close at the same time, closing costs on the 2nd are usually very low. Piggyback loans are also good for those needing 100% financing, an option that’s generally harder to get with jumbo loans. The disadvantages are that you now have two mortgages to pay and it may be harder to refinance or get home equity loans later on.