Not all homebuyers’ needs are met by traditional mortgages. Buyers who have distinctive needs could benefit by learning more about less common types of mortgages, such as a jumbo mortgage or a balloon mortgage.
Jumbo mortgages and balloon mortgages differ from traditional home loans in several noteworthy ways, and each type has its own variables in terms of costs and qualifications. Read on to see if either home loan suits your needs.
What is a jumbo mortgage?
A jumbo mortgage is a type of home loan used to finance properties that are too expensive to be guaranteed by two primary government-sponsored lending enterprises, Freddie Mac and Fannie May. Any home that costs above $548,250 will require a jumbo loan. In some of the country’s most expensive real estate markets, like Washington D.C. and San Francisco, jumbo mortgages are required for homes priced above $822,375. Each lender decides its jumbo mortgage limits, although some lenders don’t have limits. Like traditional mortgages, most jumbo mortgages are financed for 15- to 30-year terms and can have fixed or adjustable interest rates.
What is a balloon mortgage?
A balloon mortgage is generally a shorter-term home loan that requires a lump sum payment, which is typically due at the end of the loan. Unlike most traditional mortgages, which are paid off in equal payments over the term, balloon mortgages generally require lower monthly payments throughout the term, then borrowers must make a large payment to pay off the remaining debt. Because of their unusual payment schedule, balloon mortgages are less common than conventional mortgages. Balloon mortgages can be as short as three years or as long as 30, although terms tend to be shorter than those offered on conventional mortgages. Borrowers can choose a fixed or adjustable interest rate.
Should I take out a jumbo mortgage?
If you have your sights set on a property priced above the jumbo mortgage limit and can afford the costs, it might be worth it. Since jumbo loans aren’t backed by Freddie Mac or Fanny May, they’re considered riskier for lenders. Buyers will generally face higher interest rates and more stringent requirements, including credit score, proof of income and a reasonable debt-to-income ratio. If you meet the requirements, getting pre-approved online is simple.
Should I take out a balloon mortgage?
For the right buyer, a balloon mortgage might be worth it. Monthly payments for balloon loans are generally lower than conventional mortgages, but they carry higher financial risk to the buyer. If the lump sum payment comes due and the borrower can’t afford to pay it, they could be forced to refinance, in which case they’re at the mercy of the market; if rates are high at the time, they could be saddled by high interest. But for someone who doesn’t have significant savings at the time of purchase but anticipates receiving a large amount of money before the bulk of the debt is due, a balloon mortgage could provide an opportunity to buy the home they want. It could also be a good option for buyers who intend to sell their house sometime during the life of the loan.
Ready to learn more about mortgages? Call 1.800.205.3464 to speak to a First Merchants Bank loan expert today.