Jumbo Rates Are Falling Down

What is a "jumbo" mortgage? It's a mortgage that's larger than the maximum size that can be purchased by the government-sponsored enterprises (GSEs) Fannie Mae or Freddie Mac. Jumbo rates are different from conforming rates, because they are very different loans.

The definition of "jumbo mortgage" can vary by the property location. In most cases, the limit is $417,000, but in counties or states designated as "high cost," conforming loans can be as large as $625,500 for a single family property. Loan limits for conforming loans nationwide are also higher for duplexes, triplexes and fourplexes.

Jumbo mortgages may also be called "non-conforming" home loans, because they don't conform to GSE guidelines. Because they are harder to sell (or must be kept on the lender's own books), jumbo loans are less liquid and the risk to the lender is higher. Higher risk means higher rates, so jumbo mortgage borrowers usually pay more than borrowers with conforming loans.

Jumbo Rates and Terms Vary More

It's important for borrowers to understand that jumbo rates vary across the country and often by community. Jumbo lenders don't have standard GSE guidelines on which they rely; they underwrite their loans with input from their investors, and they don't have the large government-backed clearing houses to sell their loans for them. Because the market for jumbo mortgages is highly fragmented, their rates vary more. Mortgage research firm MIAC concluded that jumbo mortgage rates between competing lenders on a given day vary by about half of one percent, while conforming loans vary by just .25 percent.

Families who must rely on jumbo mortgage rates will be glad to know the lending trend is to improve jumbo packages for borrowers. The spread between jumbo and conforming interest rates, which at its worst in 2008 approached two percent, has dropped to the point that in some cases, jumbo rates are better than conforming rates. Mortgage interest rates for fixed jumbo loans tend to be higher than their conforming counterparts, while jumbo ARM and hybrid ARM rates are close to or even less than those of GSE programs.

Because jumbo mortgages are less homogeneous, finding the lowest interest rate can be a little more challenging. Borrowers need to get more quotes from competing lenders to make sure they're not paying .5 percent more than they need to. Fortunately, that's not difficult to do at sites like LendingTree.

Jumbo Loan Features

Because they needn't conform to the requirements of the GSEs, jumbo mortgages may have unique features. Interest-only jumbo loans are designed for sophisticated buyers who want to manage their cash flow. They may have highly variable income and want their mandatory payments as low as possible, or they may prefer to direct money into investments rather than putting it toward the repayment of their principal balances on their mortgages.

Other jumbo lenders offer 100 percent mortgages that are secured by pledged assets like stock portfolios. Some sell home loans called "shared equity" mortgages, in which lenders are paid a portion of the home's appreciation in lieu of a higher interest rate. There are also special stated income jumbo loans for investment property, in which the only the income from the property is evaluated, not that of the borrower.

Jumbo Lenders Hanging onto Loans

One new development may temporarily improve jumbo rates for consumers. The Wall Street Journal reported in September 2014 that some banks are hanging on to jumbo mortgages rather than re-selling them in an effort to collect the profits themselves. Only two percent of loans in the first quarter this year, the Journal reported, have been "securitized". In 2005, the level was more like 49.3 percent.

Lenders are expected to increase rates on fixed-rate 30-year mortgages to encourage borrowers to turn to ARMs which can be re-set over the long term. Because of the variables that affect lending (bank, region, state, etc.), consumers would do well to shop diligently for the most-advantageous jumbo rates.

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