CA Mortgages

Jumbo Adjustable Rate Mortgage

The highest amount a mortgage lender can loan on a mortgage is set by Fannie Mae, Freddie Mac and Ginnie Mae. These agencies buy, bundle and re-sell mortgages to investors. If the amount of the loan exceed the highest allowable amount, it falls into the category of a jumbo loan. The limit for a conventional loan in 2006 is $417,000 in the contiguous 48 states. It’s set at $625,500 in Alaska, Hawaii, Guam and the U.S. Virgin Islands.

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Whether the jumbo loan has a fixed rate or adjustable rate, they carry more risk than conventional loans and so have higher interest rates. Like other adjustable or variable rate loans, a jumbo loan will have a period of time where the rate is fixed. After that initial period, the rate will float either up or down based on an external index.

The adjustable rate contract will spell out how and when the rate can change. There is usually an annual cap or a maximum amount the rate can change in a year and a life-of-the-loan cap. The life-of-the-loan cap determines the maximum interest rate that can be charged.

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The index that the loan is tied is also determined by the lender. Different indexes will behave differently. Usually indexes that are tied to financial averages will fluctuate less than indexes based on spot prices.

The margin is the number of percentage points that are added to the index rate. For example if you have a 1-year Treasury Bill index loan with a 2.75% margin that the rate you’ll be charged is the interest rate on a 1-year treasury bill plus 2.75%.  

So once you’ve determined that you need to get a jumbo loan and you begin to evaluate different types of adjustable loans the variables to look at are:

  1. How long will the initial rate be fixed?
  2. How often will the rate be adjusted?
  3. What is the cap on each adjustment?
  4. What index is the rate tied to?
  5. What is the margin on the that index?
  6. What is the maximum rate that can be charged?

Each of these factors will determine the amount of your payment. Think about your financial goals and examine all of your options before you talk to a lender. The more you know about what’s available, the better able you’ll be to evaluate any offers.

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