To understand jumbo loans, you need to understand a little bit about two government-sponsored financial companies - Fannie Mae and Freddie Mac. These two companies buy a tremendous amount of lender-originated loans. This helps keep interest rates down and allows more people to qualify for mortgages. Fannie Mae and Freddie Mac can only purchase loans under a specified amount. Any loan that exceeds this amount is considered a “non-conforming” or jumbo loan. In 2006, for example, the limit was $417,000, so if you want to purchase a home that’s valued above this amount, you may need to investigate a jumbo loan.

Because jumbo loans can’t be funded by Fannie Mae or Freddie Mac, the interest rates are higher, and points may be as well. If you need a loan amount over $417,000, consider splitting the loan. Many lenders will split a large loan amount to help borrowers avoid jumbo loans. You would, in essence, take out two mortgages. The first would be for $417,000 and the second would be for the difference between the first mortgage and the sale price of your home. While the up front costs are higher, the savings are significant as you’re not paying a higher interest rate on the full amount for the full life of the loan.

You should only choose the interest-only option on your mortgage loan if you need some flexibility in your payment amount from month to month.

It’s becoming increasingly popular for lenders and mortgage brokers to advertise an interest-only option as way for you to get “more house for less money.” Unfortunately, that kind of thinking can get you into some serious financial trouble. If you exercise the interest-only option, you’ll eventually have to make up for all the months/years you weren’t paying on the principle, and your payments will increase - sometimes significantly.

See, what most people don’t realize is that using an interest only option doesn’t increase the length of the loan. If you have a 30-year mortgage, and exercise an interest only option for 5 years, you then have only 25 years to pay off the principle instead of 30, which means your payments increase for the remainder of your loan.

An interest-only option is great for someone who works mainly on commission, like a salesperson. The option allows him or her to pay just the interest on a mortgage if he or she has a slower month, but not be charged a penalty or late-fee for not paying the principle. You should only choose the interest-only option if you need some flexibility like this in your payment amount from month to month.