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Disadvantages of Jumbo Loans

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If you read our "Advantages of Jumbo Mortgages" article, you may wonder why all loans aren't super-sized into jumbo loans. But there are disadvantages to jumbo loans, and there are reasons why Fannie Mae and Freddie Mac set limits on the mortgages they will purchase.

Most obvious to the borrower, jumbo loans have higher costs than do conforming loans. Interest rates on jumbo loans are traditionally 1/8 to 1/4 percent (though it can be even more) higher than are rates on regular loans. Thus, you often end up paying more than one hundred dollars extra each month. In addition, most jumbo loans have a higher down payment than do traditional loans. You'll often pay thousands of dollars extra for a jumbo loan on top of the increased size of the loan.

In addition, however, jumbo loans are dangerous because they are a tempting risk. Many borrowers have eyes bigger than their checkbooks and end up borrowing money for a purchase they don't need and can't afford. Examine your finances very closely before you take out a jumbo loan. The greater size of the loan also means that you are personally liable for a greater amount if you default on the loan.

Don't be fooled: jumbo loans are a high-risk lending option. That is not to say they are a bad idea; only that you should be very careful before taking that risk.

Next Page: What are the Alternatives to Jumbo Loans?

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