What Are Jumbo, Piggyback, and Bridge Loans?
When it comes to financing your home, you have many options. Having said that, obtaining the correct form of loan for your specific scenario might be difficult. We've got you covered if your scenario necessitates something other than traditional lending offerings. Jumbo, piggyback, and bridge loans are all employed for different purposes. We spoke with local lenders to determine which loans are most suited to specific situations.
What exactly is a jumbo mortgage?
When you require a higher mortgage, consider a jumbo loan.
A jumbo mortgage (or jumbo loan) is a non-conforming loan, which means it does not meet the requirements of Fannie Mae or Freddie Mac. Most locations of the United States have a conforming loan ceiling of $548,250 for a single-family dwelling. The maximum limit in NYC, a more expensive market, is $822,375. Using this Federal Housing Finance Agency (FHA) map, you can view loan limitations by region.
Jumbo loans are mortgages that exceed the conforming loan limitations. Assume you live in New nyc City and are considering a $1.5 million property. You'll require a loan of $1,200,000 with a 20% down payment. Because that sum exceeds the conforming loan ceiling for New nyc City, you will need to secure a Jumbo loan.
Higher loan amounts may not always imply paying exorbitant interest rates. The national average 30-year fixed jumbo mortgage APR is 3.110%, according to a recent countrywide lender analysis conducted by Bankrate. The average APR for a 15-year fixed jumbo mortgage is 2.410%.
To qualify for a jumbo loan, you may be subject to tougher requirements. Each lender will have its own set of requirements, but in general, purchasers will need:
- Greater credit score: The least is 680, but the higher the score, the better.
- Plenty of cash reserves: Lenders want to know you'll be able to repay the loan, so they'll look for a lower debt-to-income ratio. Borrowers with a high income are also preferred.
- Higher down payment: At least 20% is required.
- Higher closing expenses: Due to additional procedures in the qualification process, jumbo loan closing fees tend to be higher.
Piggyback mortgages—what are they?
When two loans are better than one, choose a piggyback loan.
When finance is divided into two loans, interest rates are sometimes lower. A piggyback mortgage is used when two loans are used to acquire a home at the same time.
For example, suppose you want to buy a property but lack the required 20% downpayment. Instead, you have 10% and must fund the remaining 90%. Buyers could achieve this goal by dividing the loan into many loans. In the foregoing scenario, you may receive one mortgage for 80% and another for 10%.
Essentially, a piggyback loan allows you to make a significant downpayment without having to save all of the money.
Other benefits of piggyback loans include:
- Avoid purchasing private mortgage insurance (PMI)
- Avoid exceeding the jumbo loan limit
- Interest rates that are more advantageous
Piggyback loans typically consist of a 30-year conventional loan for 80% of the funding and a home equity line of credit for the remaining 10%. (HELOC). Another popular option is to use a 30-year conventional loan for 75% of the loan amount and the remaining loan amount for 15%. The buyer would just put down 10% in either situation.
These many mortgages are frequently sponsored by several lenders in order to reduce their risk. However, buyers are not required to conduct their own search. Their primary mortgage lender will frequently propose a lender with whom they work to complete the second, lesser loan.
What precisely are bridge loans?
When you require short-term finances, consider a bridge loan.
A bridge loan is a short-term loan that is frequently used to "bridge the gap" in financing when purchasing a new property before selling your current house. Buyers in this scenario desire to put money down on a new home but do not have enough savings or assets to do so.
Bridge loan terms often require the buyer to repay the loan within one to three years, allowing buyers to draw into the equity in their current house before selling.
Common reasons for using a bridge loan include:
Inadequate finances for a down payment on a new home.
Removes the need for a sell contingency when putting your home on the market.
Because of a life event or a change in circumstances, you need to find a new house immediately.
Because of their high interest rates and fees, bridge loans are sometimes used as a last choice. A more cost-effective approach would be to obtain a home equity line of credit or home equity loan well before listing your house for sale. These loans not only provide lower interest rates and provide the liquidity required to acquire a new home, but they also have a significantly longer repayment period.