The typical deal with jumbo loans is being turned upside down. Mortgage borrowers usually pay more for big loans than they do for loans small enough to be sold to Fannie Mae or Freddie Mac (these loans are referred to as "conforming" mortgages in the lending industry). Today, however, jumbo loans are relative bargains. .
"For as long as anybody can remember," said NPR, "homeowners have had to pay a premium to get jumbo loans. That's because they're not guaranteed by the federal government. If they're not guaranteed, they're riskier, so they cost more in interest payments."
And yet, according to the Mortgage Bankers Association, typical mortgage rates for 30-year fixed-rate jumbo loans recently stood at 4.71 percent versus 4.73 percent for conforming loans.
"This is the second consecutive week that the 30-year fixed interest rate for jumbo loans has been lower than the 30-year fixed rate for conforming loans," said the MBA.
What's a Jumbo Mortgage?
The conventional single-family loan limit ranges from $417,000 to $625,000, depending on the property's location. The FHA loan limit ranges between $271,050 and $729,750 (depending on its location) for a single-family house in the continental US. The VA, technically, has no loan limit, but in practice VA financing is restricted by the size of federal guarantees -- most lenders limit them at $417,000. Jumbo loans are generally seen as financing above the loan limits available with VA, FHA and conventional mortgages.
So how did jumbo loans get mortgage rates below conventional financing?
One reason, says The Wall Street Journal, is that banks like big loans because they're made to borrowers who represent good business opportunities.
"Banks have long courted jumbo borrowers because they tend to have deeper pockets," said the Journal. "Banks use their relationship with better-off clients to sell them other products, such as brokerage accounts and credit cards."
Another reason, according to the LA Times, is that "big banks are flooded to the gills with deposits that are costing them virtually nothing." Using those deposits for big loans to people with wealth and great credit produces almost certain profits.
If you need a jumbo loan, now may be an especially good time to be in the market, especially with up-side down rates that are close to or even lower than those of conventional loans.
Until recent weeks, the usual way for buyers to avoid the higher costs associated with jumbo financing was to make larger down payments or to get a smaller first mortgage and piggyback a second mortgage on top of it.
Today the best strategy may to borrow more in order to qualify for a jumbo loan and a lower mortgage rate.
Meanwhile, home sellers in high-cost real estate markets are elated by the changes in the jumbo market. Lower-than-conventional rates -- or even roughly equal rates -- make real estate more interesting for buyers looking at bigger homes with higher price tags.