The Homebuyer’s Guide to Jumbo, Piggyback, and Bridge Loans: Which One is Right for You?
When it comes to financing your home, figuring out which type of loan works best for you can be tricky. In some cases, what you choose will largely depend on your credit score, down payment, or life circumstances.
In this article, we’ll take a closer look at three popular loan types that can help finance your dream home without leaving you strapped for cash.
1) Jumbo Loans
Jumbo loans have higher lending limits than conforming loans, which are those that fit within guidelines set by Fannie Mae or Freddie Mac. In most areas of the U.S., a jumbo loan will be greater than $548,250. However, in expensive markets, such as NYC, a jumbo loan may exceed $822,375. These limits are set by the Federal Housing Finance Agency (FHFA) and attract buyers due to their low-interest rates.
To qualify for a conforming loan, borrowers must meet certain underwriting criteria set forth by the FHFA. By contrast, jumbo loans typically have more relaxed lending standards. For instance, jumbo loans allow for higher debt ratios and lower credit scores compared to conforming loans.
Borrowers who want a home in an expensive market, but whose income and/or credit score isn’t enough to meet the stricter standards of a conforming loan, may opt for a jumbo loan.
2) Piggyback Loans
In a piggyback mortgage, the borrower obtains two separate loans from different lenders. The second loan is placed behind or “piggybacked” onto the first mortgage, hence the name. In most cases, the first loan is a traditional mortgage, while the second one finances closing costs and other expenses.
Although piggyback loans relieve the burden of a hefty down payment, they can be risky for borrowers because they usually carry higher interest rates and stricter underwriting guidelines than conventional mortgages. For example, the second loan is often an adjustable-rate mortgage (ARM). If interest rates go up after purchasing your home, you may end up spending more than you bargained for each month.
That said, borrowers frequently choose this type of loan because it helps them avoid private mortgage insurance (PMI), which is required with most conventional loans when the down payment is less than 20 percent of the purchase price.
3) Bridge Loans
A bridge loan is a short-term, high-interest loan that’s meant to provide a temporary funding option while selling an existing home and buying a new one at the same time. In other words, this type of loan “bridges the gap” when your cash isn’t enough to cover both buyer and seller costs in a typical real estate transaction.
Bridge loans may also be used for renovation projects when traditional bank loans can’t be obtained. They’re typically written with an interest rate of 10 percent or more.
A bridge loan is popular among real estate investors because the interest on the initial investment is tax-deductible. It’s also a good option for borrowers who experience an urgent life event and need to sell their homes quickly while purchasing a new one.
What Type of Mortgage Is Right for You?
Jumbo, piggyback, and bridge loans may be appropriate choices depending on your circumstances and goals. Just remember that you should always obtain sound advice from a qualified mortgage professional or an experienced real estate advisor who can discuss possible roadmaps toward a successful home purchase.
For more information on different loan or mortgage types, reach out to an Elegran advisor today!
