Here’s Why You May Not Want to Take Out a Jumbo Mortgage — Even if You Can Afford One

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At a time when interest rates are high, a jumbo loan is something you may want to avoid. Read on to learn why. 

As of the end of June, the median existing home sale price was $410,200, according to the National Association of Realtors (NAR). So if you’re looking to buy a home in that price range, you’re probably looking at signing a conforming mortgage.

Conforming loan limits for mortgages commonly change from one year to the next. But right now, you’ll be in conforming loan territory if you manage to keep your mortgage to $726,200 or less. For context, last year, that limit was $647,200. You should also know that the limit for conforming mortgages is considerably higher in Alaska and Hawaii — $1,089,300 — due to the higher cost of homes there.

To be clear, this doesn’t mean you can’t take out a home loan that exceeds these thresholds. If you’re buying a more expensive property and you have the income to support a larger loan, a mortgage lender might be more than willing to give you one. But you should know that now in particular is not a great time to sign a jumbo loan, which is a mortgage that exceeds the limits for a conforming loan.

You may be looking at a huge amount of interest

If you’re looking to buy a home today, you’re probably aware that mortgage rates are far from inexpensive. In fact, as of late July, the average mortgage rate on a 30-year conforming loan was 6.81%, according to Freddie Mac.

But if you’re signing a jumbo loan, you can expect the interest rate on your mortgage to be even higher. And at a time like this, that might prove to be prohibitively expensive.

Of course, there are different factors that will determine what mortgage rate you’re looking at on a jumbo loan. In addition to the size of your loan, your income and credit score will help dictate what borrowing rate you’re eligible for.

But all told, a jumbo loan is apt to be a lot more expensive than a conforming loan not just by virtue of the larger amount you’re borrowing, but due to the fact that you’re likely looking at a significantly higher interest rate. So you may want to do what you can to stick to a conforming mortgage.

You may want to wait or rethink your budget

In some parts of the country, a conforming loan limit of $726,200 gives you plenty of options. But in certain housing markets — particularly major metro areas — $726,200 is not going to go very far.

That said, it could work to your benefit to only borrow within conforming loan limits. So you may want to consider buying a less expensive home even if you can afford a pricier one. Or, you may want to hold off on buying for another year or two so you’re able to save up more of a down payment. The more money you put down on a home, the less you have to borrow.

That said, one thing you shouldn’t assume is that conforming loan limits will be higher in 2024 than in 2023. That $410,200 median home sale price for June actually represents a 0.9% decline from a year ago, says the NAR. And since conforming loan limits tend to correlate to home values, if prices come down in 2023, those limits could drop for 2024.

Taking out a jumbo mortgage might seem like a reasonable thing to do if you’re buying in an expensive market and you earn enough to keep up with a series of larger loan payments. Just consider the drawbacks of signing a jumbo loan before moving forward, and see if there’s a reasonable way to avoid that situation.

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