Consumers who buy more expensive houses are often surprised to find that the mortgage rates advertised on television or in the newspapers don't apply to them. Most ads feature the lowest rates for customers with the best profiles, but jumbo mortgage rates are typically higher.
What's a Jumbo Mortgage?
Jumbo mortgages are conventional (non-government) loans that are too large to conform to the guidelines of Fannie Mae and Freddie Mac. In most cases, this means home loans that exceed $417,000, but in "high-cost" parts of the country, this limit is $625,500 ($938,250 in Alaska, Hawaii, Guam and the USVI). Fannie and Freddie are the clearinghouses that sell 90 percent of conventional loans to investors, helping lenders manage cash flow and increase their profits. Because jumbo mortgages can't be sold to investors as easily as conforming loans, they generally come with higher mortgage rates.
Borrowers Want More Jumbos: Rates Up!
Demand for jumbo home loans spikes sharply when interest rates drop, and lenders can't always keep up. "Borrowers with jumbo loans tend to be most sensitive to changes in rates, and that sensitivity has been clearly apparent in the past few weeks with double and even triple digit percentage changes in refinance application volume for jumbo loans," said Mike Fratantoni, MBA's Chief Economist, in a Mortgage News Daily article.
When demand is high and lender supply is low, prices increase. This is another reason that jumbo mortgage rates tend to be higher than conforming rates -- there's less competition among lenders.
Investors Want More Jumbos: Rates Down!
Mortgage investors want more jumbo mortgages, too, however, and mortgage lenders are stepping up to offer them, says National Mortgage News. The premium rates they command, coupled with the fact that the more affluent borrowers with jumbo financing are less likely to default, are inducing more investors to purchase them.
That's an excellent thing for borrowers, because it reverses the high-demand low-supply problem. Today, mortgage lenders want borrowers, and they have to reduce rates or ease up on their underwriting to get more applications.
Jumbo Mortgage Rates Come Down
During the 2014 summer, banks including JP Morgan Chase &Co., Bank of America and Wells Fargo explored ways to offer more jumbo mortgages to borrowers with deep pockets. Jumbo mortgage rates actually dropped to levels lower than those of conforming loans for many borrowers. In addition, lenders began accepting lower down payments and credit scores. In September 2014, Wells Fargo began to loosen requirement criteria on jumbo loans, dropping the minimum FICO score to 700.
Shopping for Jumbo Mortgages
The tug-o-war between jumbo investors and borrowers causes rates to fluctuate a great deal, and they can move very quickly. That means borrowers must follow a few rules:
- Get mortgage quotes at the same time if possible. One lender might offer 4.00 percent, while another might give you a 4.25 percent quote a few hours later. The first lender, however, may be charging 4.375 by then. To be useful, quotes should be obtained very close together, time-wise. This is easier when using an online mortgage marketplace like LendingTree.
- Shop a lot and get at least four mortgage quotes from competing jumbo lenders. The jumbo mortgage market is extremely fragmented, which means rates vary more, and loans do not all have the same guidelines or terms. Investors can make up their own rules, because jumbo mortgages are not standard Fannie Mae or Freddie Mac products. Mortgage industry analytics company MIAC says that jumbo mortgage rates vary between lenders twice as much as conforming rates do.
- Small differences matter. For a $50,000 mortgage,a .250 percent increase in closing costs is $125. That probably won't break anyone's bank. But for a $500,000 mortgage, it's $1,250.
- For jumbo home loan borrowers, shopping can really pay off -- or not shopping can be very costly.