A jumbo loan is a type of mortgage which is for purchasing expensive, luxury homes. It is considered to present a higher risk to the lender than a loan for a smaller amount, so the interest rate is set somewhat higher. A jumbo loan is more likely to be necessary in states and regions where average home prices are high, especially in the continental U.S.

FreddieMac.com indicates that the maximum limit for non-jumbo (conforming) loans is currently four-hundred and seventeen thousand dollars, in the continental United States. In Hawaii, Alaska, Guam, and the Virgin Islands, it is significantly higher, at $625,500 dollars. A mortgage above these limits is considered a jumbo loan. The limits increase if the home has more than one unit; for example, a three unit residence in Alaska could be mortgaged for up to $967,950 dollars before it would be referred to as a jumbo loan. Their web site also states that these limits will remain the same through next year (2008).

According to wikipedia.org, lending institutions generally favor a greater down payment on jumbo loans, and consider them more risky because it takes longer and is more difficult to resell a foreclosed-upon luxury home at its full value. It also indicates that a mortgage for an amount greater than six-hundred and fifty thousand is referred to as a “super jumbo” mortgage. Additionally, Wikipedia points out that such a loan may be more costly to refinance because of higher closing costs, and that the increase in monthly payments upon a rate increase (if the mortgage is adjustable) can be quite significant (due to the loan’s large amount).

Rates for jumbo loans can vary substantially from one bank to the next. Bankrate.com indicates that thirty-year jumbo loan interest rates in the United States currently (December, 2007) range from 5.75 to 8.5 percent. The average rate has increased in the past six months. Like other mortgages, they are available in the form of a 15-year loan as well, which typically has somewhat lower interest rates (but higher monthly payments) than a longer-term equivalent.

Basically, a jumbo loan is necessary when purchasing an expensive residence, and will have a somewhat higher interest rate; otherwise, it is not greatly different from other mortgages, at least from the borrower’s perspective. Mortgage borrowers can avoid the higher rates of jumbo loans by making a larger down payment or purchasing a less expensive home.