Mortgage Surprise: Jumbo Loans Are Suddenly Cheaper Than Conforming Loans
In the latest quirk of the pandemic mortgage market, rates on jumbo loans have fallen significantly below those on conforming loans. The average rate on a 30-year jumbo loan was just 3.44% in Bankrate’s latest national survey, well below the 3.71% average for conforming mortgages.
Jumbo loans rarely offer a better deal than conforming loans. From mid-2020 to mid-2021, for example, jumbo mortgage rates were on average 0.34 percentage points higher than conforming loans. The gap reached almost half a point, according to the Bankrate survey.
However, that gap narrowed at the end of 2021. In 2022, things got weird: Jumbo rates slipped a little lower than conforming rates, and now they’ve widened the gap. Bankrate’s Jan. 26 survey marked the third week in a row that jumbo rates were more than 0.2 percentage points lower than conforming loans.
Why the inversion? Mortgage experts point to demand from investors who end up buying giant mortgages.
“Strong investor demand appears to have lowered yields on jumbos relative to conventional loans, especially as the use and affordability of jumbos have increased,” says Lynn Reaser, chief economist at Point University. Loma Nazarene.
What is a jumbo mortgage?
A jumbo mortgage is a loan in an amount that exceeds the Federal Housing Finance Agency’s loan limits for mortgages that can be purchased by government-sponsored entities Fannie Mae and Freddie Mac.
For most of the United States in 2022, the loan amount that separates conforming loans from jumbo mortgages is $647,200. In expensive housing markets — including much of California, all of New York City, the District of Columbia, and all of Alaska and Hawaii — the breaking point is 970,800 $.
Some markets fall between the two. In Boulder County, Colorado, the 2022 limit for conforming loans is $747,500. In Florida’s Monroe County, home of the Keys, this year’s cap is $710,700. In the Nashville metro area, it’s $694,600.
When you get a jumbo mortgage, your lender can’t rely on federal support from Freddie and Fannie to reduce their risk. With conforming loans, lenders expect to recoup some of their losses if a borrower defaults. And lenders know they can sell their loans to these government-sponsored companies that promote liquidity in the home loan market.
This explains why jumbo rates are generally higher: lenders who make loans and investors who buy them consider jumbo loans to be riskier than conforming loans.
As a result, jumbo loans can often be more expensive or have more onerous qualification requirements. And borrowers on the cusp of a jumbo loan often pay a larger down payment to bring the loan amount below the conforming loan limit. For example, the buyer of an $850,000 home who has the luxury of having money in the bank could deposit $203,000 to obtain a conforming loan of $647,000. For now, however, the same buyer could settle for a 20% down payment of $170,000 and a jumbo loan for the remaining $680,000.
Why are jumbo loans suddenly a better deal?
The average conforming loan rate rose sharply in the first weeks of January. This is largely because of the path that mortgages follow after they are issued by lenders: mortgages are bought by Fannie and Freddie and then presented as investments.
“When 10-year Treasury yields rise, rates on mortgages that are bundled into mortgage-backed securities also rise,” says Greg McBride, chief financial analyst at Bankrate. “Jumbo rates are less dependent on secondary market prices because they’re not priced into mortgage-backed securities as often.”
Additionally, giant lenders tend to be quite picky about the creditworthiness of giant borrowers.
“The jumbo loans we make are all stronger borrowers – high FICO, lower debt-to-income and loan-to-value, and high reserves,” says Jim Sahnger of C2 Financial Corp. in Jupiter, Florida.