Jumbo Vs. Conforming Mortgage

A conforming mortgage is a home loan that fits within the limits set by the Federal Housing Finance Agency. If the home is over this limit, you'll need to get a jumbo loan. Conforming and jumbo loans are similar in nature, though there are some differences. Deciding which loan is right for you depends on a number of factors.

Loan Limits

The Federal Housing Finance Agency sets the limits for conforming loans. As of 2010, the limit is generally $417,000 for a single family home, but it varies based on where you live. Limits in the four high-cost areas of Hawaii, Alaska, Guam and the U.S. Virgin Islands are 50 percent higher, and there are some metropolitan areas in the states where limits are even higher than that. When borrowing above this amount, you need a jumbo loan.

Interest Rates

The high amount of jumbo loans puts them at a higher risk for default. Thus, jumbo loans will typically have a higher interest rate than conventional loans. The actual interest rate that you pay on either a conventional or jumbo loan, however, varies based on the type of loan that you get and your personal credit score.

Fixed vs. Variable

Both conforming and jumbo mortgages can have fixed or variable rate mortgages. In a fixed rate mortgage the interest rate stays the same for the duration of the loan, but in a variable rate mortgage the interest rate changes after an initial period. If you get a variable rate mortgage, your monthly price could increase significantly with a rate increase, particularly if you are paying off a jumbo mortgage, which has a higher principal balance on which to base interest charges.

Comparing Your Options

If the home that interests you is well above the conforming loan limits, you'll have no choice but to get a jumbo loan. Your best option is to compare types of mortgages and interest rates to find the one that works best for you. If you are close to the limit, however, consider saving up for a higher down payment or taking out a second mortgage to cover the difference in cost.

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