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Jumbo loans are exceptionally large loans used to buy more expensive properties, and because they represent higher risk for lenders, they fall under special guidelines. But as the cost of real estate across the USA changes, the definition of a “jumbo” loan can also change, and the price that defines these loans is determined each year by Fannie Mae and Freddie Mac, the government-affiliated agencies that fund conventional mortgages. In 2005, for instance, loans above $359, 650 were considered jumbo, but in 2006 the amount was raised to $417,000 and it was kept at that level for 2007 (except for some special regions like Alaska and Hawaii, where the limits are higher).

The reason this is important is that jumbo loans generally cost more than “regular” loans, because lenders charge higher interest rates of about a quarter to a half of a point more for jumbos. This can add a significant amount to your monthly payments, and can add tens of thousands of dollars over the lifetime of your loan. If you want to avoid the higher interest, it is a good idea to try to stay within the conventional guidelines and not cross over into jumbo territory. Some lenders, for instance, will let you take out two loans, a first mortgage for the majority of the funds plus a smaller mortgage that is packaged together with the first one. For example, if you want to borrow $420,000 you could take out a smaller loan of $5,000 to effectively reduce your main loan to $415,000, which would qualify for you for a less expensive conventional loan and help you avoid the cost of a jumbo loan.

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