2nd Mortgage and Jumbo Loans

Often used in conjunction with a first mortgage, persons may employ 2nd mortgages to avoid having to pay mortgage insurance. However, this is not the only reason to go with a combination of two loans instead of one larger loan. A second reason to make this decision is to avoid a jumbo loan.

Jumbo loans refer to loans that exceed the limits set by Fannie Mae and Freddie Mac, two federal agencies that buy large numbers of mortgages on the secondary market. These purchases drive down the rates of mortgages that meet these entities’ limits. Fannie Mae and Freddie Mac only purchase loans under the amount of $333,700.

At this limit, the mortgage market splits. Loans under the limit have rates anywhere from a quarter to half a percent less than other loans. Loans above the limit, known as jumbo loans, do not enjoy these lower rates.

Under some circumstances, it makes sense for borrowers to get two mortgages to avoid a jumbo loan, assuming they cannot afford a down payment high enough to bring their first loan under the limit. Just like taking a 2nd mortgage to avoid mortgage insurance, taking a 2nd mortgage to avoid a jumbo loan involves several factors. The total amount of loan you need, the rate difference in loans above and below the limit, and whether you hope to pay off the 2nd mortgage before the first should all be considered.

Chances are, if your loan is only slightly above the limit, you will come out ahead by getting a 2nd mortgage rather than taking out a jumbo loan. Though the difference in interest rates is relatively small, taking a 2nd mortgage in order to get a lower rate on the first can often be a frugal decision.