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All About Discount Points On A Home Loan and Jumbo Home Loans

Jumbo Home Loans

The discount point, a fee paid to a lender at closing and used to prepay a portion of the interest on the loan. Discount points are charged so that the note rate can be lower than the prevailing market rate. So a lot of times in lending we use this term, discount point. I think it’s a bad term to use because you use discount point and people think it’s a discount. What a point is, is an upfront fee associated with the closing of the transaction that’s interest based, that gets you a lower interest rate than market rates. So for example, let’s just say that market rates are 4% and you wanted a lower interest rate. You could pay a fee, let’s just say it’s one point, which would be 1% of the loan amount.

So, if you’re doing a $300,000 loan, one point, 1% of the loan amount would be $3,000. So, let’s just say you’re getting a 4% rate and you said, “Hey, I’d like to get a lower interest rate.” We could show you options to buy the interest rate down. You would pay that fee at closing to receive that lower interest rate. The idea is I’m getting a lower interest rate which is going to provide me with a lower monthly mortgage payment and over time that lower mortgage payment, that money that I’m saving, will be greater than the initial upfront expense to get the interest rate, that discount point. So, that’s what a point is. A point is an interest-based charge, not an origination fee to the lender that secures an interest rate that’s lower than prevailing market for the customer.

Jumbo Home Loans

Jumbo loan – a loan that exceeds two lending limits established by Fannie Mae and Freddie Mac for conforming loans aka non-conforming so in lending, whether we do in an FHA a VA or conforming loan like a Fannie Mae or Freddie Mac loan. We have a backing from some entity whether it’s a federal government because of its Fannie Mae Freddie Mac or Thor FHA or VA. In a jumbo loan standpoint when it’s above the loan limits set by these entities, contact your lender because in each area that limit can be different but when it exceeds that limit it’s considered a Jumbo home loan and essentially it’s a portfolio loan to the lenders doing because there’s no government back agency insuring the mortgage. So it’s a little riskier. Usually, interest rates a little bit higher and sometimes the guidelines that we set forth on jumbo home loans might be a little bit more restrictive or harder to accomplish.

For example things like reserves. Usually, on jumbo home loan lenders require a little bit more reserves than they would on an FHA or Fannie Mae/Freddie Mac type loan. What are reserves? Reserves are the ability to make your mortgage payment out of some sort of account, asset account for a period of time so six months reserves would be six months of the payments in savings after the close of escrow. There’s no problem with a jumbo home loan they’re readily available we have 20 or 30 different lenders that do jumbo home loans. You just have to understand that there might be some differences and each lender can be uniquely different.

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