Most of the mortgages surpassing $1 million are not your typical conventional mortgages. The hefty price tags associated with luxury homes often exceed the limits imposed by conventional loan regulations. In fact, in most parts of the continental U.S., the maximum amount that conventional mortgage banks can offer in 2023 is $726,200. This means that homebuyers in the 26 cities with an average mortgage balance of over $1 million have likely turned to jumbo mortgages to finance their dream homes.
Jumbo mortgages are designed for loans that exceed the conventional mortgage limit. Unlike regular mortgages, these loans are not sold to government-sponsored enterprises like Fannie Mae and Freddie Mac. Instead, banks often retain jumbo mortgages on their own books and implement more stringent underwriting standards. As a result, jumbo mortgage rates differ from those offered for conforming mortgages. In fact, the average jumbo mortgage rate currently exceeds 8%, higher than the average rate of 7.50% for conforming mortgages.
While crossing the $1 million home price threshold may symbolize an achievement, the reality is that most Americans cannot afford the monthly payments associated with million-dollar mortgages. With an annual percentage rate of 8%, a 30-year jumbo mortgage for $1 million would entail a monthly payment of nearly $7,400. Additionally, other costs such as taxes, insurance, and maintenance expenses add to the financial burden of homeownership.
The increasing prevalence of million-dollar mortgages in various cities and counties may indicate a noteworthy trend. As the number of locations where $1 million mortgages become the norm continues to rise, it will be interesting to see how the market adapts to this shift.
Furthermore, it is anticipated that conforming loan limits will also rise in the coming years. HSH Associates, a respected residential real estate observer, has observed a consistent increase in conforming loan limits for single-family homes over the past seven years. From $417,000 in 2016, the limit has now reached $726,200 in 2023. Extrapolating this trend, it is feasible to imagine that a million-dollar mortgage may no longer qualify as a jumbo mortgage by 2028.
FAQ
What is a jumbo mortgage?
A jumbo mortgage is a type of home loan that surpasses the maximum loan limit set by conventional mortgage regulations. It is typically used to finance higher-priced properties.
How do jumbo mortgages differ from conventional mortgages?
Jumbo mortgages are not sold to government-sponsored enterprises like Fannie Mae and Freddie Mac, unlike conventional mortgages. Banks usually retain jumbo mortgages on their own books and enforce stricter underwriting standards for these loans.
What are the current average rates for jumbo mortgages?
As of October 2023, the average jumbo mortgage rate exceeds 8%, which is higher than the average rate for conforming mortgages.
Why are million-dollar mortgages not affordable for most Americans?
With an APR of 8%, a 30-year jumbo mortgage for $1 million would require a monthly payment of nearly $7,400. Additionally, homeowners must also consider taxes, insurance, and other maintenance costs, making million-dollar mortgages financially out of reach for the majority.
[source: Experian]