When it comes to purchasing a home in Modesto, homebuyers might find themselves needing to explore different financing options. One such option, especially for higher-value properties, is a jumbo home loan. In this analysis, we’ll break down what jumbo loans are, discuss the current Jumbo loan limits, and explore the benefits to homebuyers in California. We’ll also touch on piggyback loans as a strategy to avoid paying Private Mortgage Insurance (PMI).
What Is Considered a Jumbo Loan in Modesto?
A jumbo mortgage, is a type of financing for properties that exceed the conforming loan limits set by the Federal Housing Finance Agency (FHFA). Unlike conventional loans, which conform to the guidelines established by Fannie Mae and Freddie Mac, jumbo loans are designed to accommodate larger loan amounts typically associated with luxury homes or properties in high-cost areas.
Current Conforming Loan Limits:
For 2024, the conventional mortgage limit for a single-family home in most parts of California, including Stanislaus County and Modesto, is set at $766,500. This means that any mortgage exceeding this amount is considered a jumbo loan. It’s important to note that these limits can vary based on the county and whether the property is muti-unit or not. Please see the chart below.
FHA Loan Limits:
The Federal Housing Administration (FHA) sets its own loan limits, which are generally lower than the conforming loan limits. For Stanislaus County, the FHA loan limit for a single-family home is $517,500 for 2024. FHA loans are designed to help lower-income individuals and first-time homebuyers qualify for a mortgage, but they come with their own set of guidelines and restrictions.
Since the median home price in Modesto is currently $465,000, a regular conventional or FHA will meet the needs of most home buyers. But what about buyers in luxury neighborhoods like Del Rio, Riverbank, Oakdale, etc? In some of these neighborhoods, the average home price can easily exceed $1 million or more.
Benefits of Jumbo Loans:
Benefits of Jumbo Loans:Jumbo loans offer several benefits that make them an attractive option for homebuyers looking to purchase higher-value properties:
Higher Loan Amounts
Jumbo loans allow homebuyers to finance properties that exceed the conforming loan limits. This is particularly useful in high-cost areas, where property values are often above the national average.
Flexible Terms
Lenders offering jumbo loans often provide more flexible terms compared to conforming loans. This can include adjustable-rate mortgage (ARM) options, interest-only payments, and longer loan terms, giving borrowers a range of choices to suit their financial situation.
Competitive Interest Rates
While jumbo loans typically have slightly higher interest rates than conforming loans, they are often competitive. Lenders may offer better rates to borrowers with strong credit profiles and substantial down payments, making jumbo loans an appealing option.
No Private Mortgage Insurance (PMI)
Borrowers with less than 20% down payment can still avoid PMI though combo loan options. This can result in significant savings over the life of the loan.
Piggyback Loans as a Strategy to Avoid PMI:
Piggyback Loans as a Strategy to Avoid PMI:One strategy to avoid paying PMI is to use a piggyback loan, also known as an 80-15-5 or 80-10-10 loan. This involves taking out two separate loans simultaneously. Please note, qualified home buyers have jumbo financing options up to 95% loan to value in California. Let’s look at 80-10-10 example below, 90% financing.
Primary Loan (80%)
The primary mortgage covers 80% of the home’s purchase price, which keeps it within the conforming loan limits (lower interest rates) and avoids PMI.
Secondary Loan (10%)
The secondary loan, or piggyback loan, covers 10% of the purchase price. This is usually in the form of a Home Equity Line of Credit (HELOC) or a second mortgage.
Down Payment (10%)
The borrower makes a 10% down payment, which is lower than the 20% typically required to avoid PMI on a single jumbo loan.
Benefits of Piggyback Loans:
- Lower Interest Rate: By keeping the primary loan at or below the conforming loan limit, buyers can often take advantage of lower rates.
- Avoid PMI: The primary benefit of a piggyback loan is the ability to avoid paying PMI while still financing a significant portion of the home’s value.
- Potential Tax Deductions: Interest paid on both the primary mortgage and the secondary loan may be tax-deductible, further reducing overall costs.
- Flexibility: Borrowers can choose to pay off the secondary loan faster, reducing their total debt and potentially improving their credit score.
Considerations for Piggyback Loans:
- Higher Closing Costs: While avoiding PMI saves money, borrowers should be aware that the secondary loan may come with higher interest rates, and greater closing costs due to there being two separate loans being processed.
- Qualification Requirements: Borrowers must qualify for both loans, which can be challenging if they have a lower credit score or higher debt-to-income ratio.
- Complexity: Managing two loans requires careful financial planning and discipline to ensure timely payments on both.
In the competitive real estate market of Modesto, understanding the various loan options available is crucial for homebuyers. Jumbo home loans provide a viable solution for those looking to finance higher-value properties, offering benefits such as higher loan amounts, flexible terms, and no PMI.
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