Jumbo Mortgage Rates: How to Pay Less

So-called "jumbo mortgages" are non-government loans in amounts that exceed limits set by Fannie Mae and Freddie Mac, the government-sponsored entities that buy and sell the majority of home loans in the US. These limits range from $417,000 to $625,500 in higher-priced areas. "Super jumbo" mortgages are even larger; they can range from $650,000 to millions of dollars.

Home buyers are often surprised to discover that these larger loans can carry higher interest rates (and super jumbo mortgage rates are higher still). After all, if it takes about the same amount of work to process a large loan as it does a small one, and lenders get more income from larger loans, why would jumbo mortgage rates be higher? There are a number of reasons for this, which are outlined below. It's important for buyers of more expensive property to understand how jumbo mortgages work so that they can minimize their costs and find the lowest rates.

Lack of Standardization

Jumbo mortgages are also referred to as "non-conforming" home loans. This is because unlike loans sold through Fannie Mae or Freddie Mac, there are no universal eligibility and underwriting guidelines for jumbo products. This means that the terms of jumbo home loans can vary wildly -- for example, one lender might allow self-employed applicants to prove their income with bank statements instead of tax returns (this is called an Alternative Income Verification loan) while another might want to see tax returns, business licenses and financials from an accountant. Some lenders approve 90 percent jumbo loans while others draw the line at 80 percent. Some allow log homes and high-rise condos while others won't touch them. Jumbo mortgage lenders also vary in their willingness to accept applicants with less-than-excellent credit scores. Bloomberg recently reported that some of today's jumbo mortgages have complex features that "can increase risks for certain investors." To induce investors to buy these loans, they must pay higher interest rates than safer conforming products that also compete for investors' attention.

Fragmented Markets

Another reason jumbo loan rates can be higher is that they are more difficult for lenders to sell on the secondary market. Conforming home loans, on the other hand, get their name because every loan conforms to the same guidelines, regardless of which lender originates it. That means these smaller mortgages can be treated as identical commodities, bundled together and easily sold as mortgage-backed securities (similar to stocks and bonds), or MBS. Jumbo mortgages aren't sold as easily, which increases the cost to the lenders that originate them. Bigger loans may be held by the lenders that make them (in this case, they are also called "portfolio loans"). They may otherwise be sold to groups of investors who have established the guidelines for the loans that they are willing to buy.

Jumbo Rates not Always Higher

Because jumbo mortgage lenders operate under different circumstances and rules than conforming lenders, their interest rates don't always follow the same trends. The spread between conforming rates and jumbo rates is not a constant thing; there have been times in which 30-year jumbo loan rates were nearly two percent higher than conforming rates, and other times jumbo mortgages have actually become cheaper than conforming rates. Sensible consumers will check both jumbo and conforming interest rates before committing to a home loan. It might be cheaper for a borrower purchasing a $625,000 house with 20 percent down to borrow $417,000 from a conforming lender and take a second mortgage for the remaining $83,000 instead of borrowing $500,000 from a jumbo lender.

Comparison Shopping for Important for Jumbo Loans

Because of their fragmented markets, jumbo mortgage rates vary more than conforming rates. Data from MIAC, the Mortgage Industry Advisory Corporation, suggests that conforming loan rates typically vary between lenders by about .25 percent on a given day, while jumbo mortgage rates vary between lenders by twice as much. In addition, because of their higher loan amounts, paying too much for a jumbo mortgage can be more costly over time. This can be illustrated by the examples below: compare the dollar savings generated by choosing the less costly conforming loan to that realized by a lower cost jumbo loan.

Conforming Loan Comparison
Loan Amount: $ 300,000
  Rate Payment Total Interest
Loan A 4.00% $1,432.25 $215,608.52
Loan B 4.25% $1,475.82 $231,295.08
Difference 0.25% $43.57 $15,686.56
Jumbo Loan Comparison
Loan Amount: $ 600,000
  Rate Payment Total Interest
Loan A 4.00% $2,864.49 $431,217.04
Loan B 4.50% $3,040.11 $494,440.27
Difference 0.50% $175.62 $63,223.23

Because the difference between the cheapest and most expensive loan is greater for jumbo products, and because the larger loan amount increases the difference in payment, there is a greater opportunity to save by comparison shopping for a jumbo mortgage. Obtaining multiple quotes from competing jumbo mortgage lenders is an easy process with tools like LendingTree's LoanExplorer, so there is no reason for consumers to overpay when they choose their jumbo financing.