The size of your mortgage can have a huge effect on the rate that you pay. Very low loan amounts often come with pricing add-ons, while conforming loans and FHA mortgages carry the best rates. As the loan amount increases into the jumbo or super-jumbo range, the rate climbs. More…
How the size of your mortgage affects its rate
At one end of the scale are very small mortgages -- $50,000 and under. These mortgages often come with pricing add-ons of about one percent of the loan amount. Why? Because, according to the Mortgage Bankers Association’s Mortgage Banker Performance Report (second quarter 2012), it costs lenders $3,224 per loan to originate mortgages – without the extra fee, they’d be paying to originate these little loans.
Conforming mortgages: the bargains
The most economical mortgages to originate are conforming mortgages. They’re called conforming because they conform to guidelines set by government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. Fannie and Freddie buy mortgages from lenders, bundle them into mortgage-backed securities and sell them to investors. Loans that are backed by Fannie Mae and Freddie Mac are less risky for mortgage lenders, so they can charge less for them. One of the rules lenders have to abide by is a limit on the loan amount. In most locations, that limit is $417,000, but in areas with more expensive housing markets it can be as high as $625,500.
FHA mortgages also have loan limits. They are based on local home prices and range from a low of $271,050 to a high of $729,750. Like conforming mortgages, what keeps FHA loan pricing down is the government backing that protects mortgage lenders if borrowers default. Mortgages that don’t meet the guidelines of Fannie Mae, Freddie Mac or the federal government are called “non-conforming” or “jumbo” loans.
How much more do jumbo mortgages cost?
The difference, or spread, between jumbo and conforming mortgage rates has increased dramatically since the mortgage crisis began in 2007, as you can see from this graph created by the Federal Reserve. Before that, jumbo mortgage rates were consistently about .25 percent higher than conforming rates. As the mortgage crisis worsened, loans that couldn’t be sold through the GSEs or guaranteed by FHA were considered so risky that by 2009, jumbo mortgage rates were over two percent higher than conforming mortgage rates! Today, they have come down considerably, but the spread remains stubbornly at about .75 percent.
Next come the loans that mortgage lenders call “super-jumbos.” When the conforming mortgage limit was $417,000 for everyone, lenders considered dubbed loans bigger than $650,000 “super-jumbos.” Today, though, FHA mortgages in some areas are higher than that! In general, a super-jumbo mortgage is a jumbo loan that has stricter underwriting guidelines and / or higher pricing solely due to its higher loan amount. For example, one large national lender adds .25 percent to its fees for 80 percent loans when the loan amount falls between $1 million and $1.5 million, and .75 percent for loans over $1.5 million. These fees are often dependent on the loan-to-value ratio and the applicant’s credit score. For very high mortgage amounts ($2 million to $20 million or higher, depending on the lender), you don’t necessarily see more fees – what you see is higher down payment and credit score requirements.
What does this mean for you?
What it means is that you can’t just look at a rate advertisement and apply it to your own situation. You have to contact lenders and make sure they understand your loan amount and other factors. This is especially true if you have a jumbo or super-jumbo mortgage. The market for these loans is extremely fragmented and rates at these loan amounts vary more than they do at the conforming and FHA levels, so shopping and comparing rates is a must. What it also means is that the higher your loan amount, the more you stand to gain by shopping and comparing rates. If you shave .25 percent off a 4% rate and you have a $100,000 loan, you save $5,148 over 30 years. If you have a $1 million dollar loan, that difference is $51,479 – not bad for a few hours (or less!) spent comparing mortgage rates when you buy or refinance your home.