Mortgage Case Study: Non-conforming Jumbo Or Conforming Plus HELOC

Comparing Two Attractive Mortgage Options

To avoid paying higher rates for jumbo loans, many consumers take out a conventional mortgage and fund the balance of their purchase with a home equity line of credit (HELOC). To help you figure out if that approach makes financial sense for your particular situation, here is a case study for you to consider.

Jumbo Or Combo?

The limits for conforming or conventional loans are announced each year by Fannie Mae and Freddie Mac. For 2013, the most you can borrow without having to revert to a jumbo loan is $417,000 for a single-family home. Therefore, if you are buying a home and need a loan of $420,000 to pay off the existing mortgage, you will need to use a jumbo to cover the full amount. But there is another option. You could structure a combination loan—sometimes referred to as a piggyback loan—by combining a conventional mortgage with a HELOC. In that case, you could borrow your conventional loan limit of $417,000, and simultaneously establish a line of credit worth at least$3,000. Combine the two amounts, and you have a total of $420,000, without taking out a higher-interest jumbo loan.

SEE ALSO: How HELOCs Hurt Refinancing


Interest on jumbo loans is usually at least half a percentage point or so more than that of conventional loans, so a combo can save you money. Rates on fixed rate, 30-year jumbos in February 2013 hovered around 4.19 percent, for example, compared to 3.79 percent for comparable conventional mortgages. Using the above example, the $420,000 jumbo, at 4.19 percent, will cost about $738,500, including interest, over the full 30-year payback period. But the conventional loan of $417,000, at 3.79 percent, will cost you about 700,000 or less—for a total savings of close to $40,000. Meanwhile, the monthly payments on the conventional loan—not counting extras like taxes and insurance—will be roughly $1,940, versus a jumbo mortgage monthly payment of around $2,050. You will also be charged interest on your HELOC, of course. But if you aggressively pay it off, using the savings you made by not taking out a jumbo, then you can eliminate it rather quickly.

SEE ALSO: HELOC Pain: The Next Crisis?

Other Considerations

It is important to note that, if you live in an area that Fannie Mae deems especially pricey, there could be exceptions to the standard cap of $417,000. In places like Honolulu or San Francisco, you may be able to borrow up to $625,000 with a conventional loan. To find out if you live in one of those counties, contact Fannie Mae or visit the agency’s website. Whenever you shop and compare mortgages, take advantage of the knowledge and experience of an expert financial plannertax expert, or loan officer. They can help you fine-tune your analysis and cost comparison, while including incidental expenses or deductions that may also add up to a significant amount of money.
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