This is part of an ongoing blog series where we answer common questions among home buyers. Today’s question deals with jumbo loan mortgage rates in relation to smaller mortgage products.
Do jumbo loans have higher interest rates than their smaller conforming counterparts?
The answer might surprise you. Over the last few years, jumbo loans have actually had lower rates than conforming products, on average. The secondary market for these “oversized” mortgage loans has been very competitive in recent years, resulting in lower pricing.
What Is a ‘Jumbo’ Mortgage Exactly?
A jumbo loan is a relatively large mortgage loan. It exceeds the size limits set by the Federal Housing Finance Agency (FHFA). Freddie Mac and Fannie Mae use these limits when purchasing loans from lenders. A loan that can be sold to Freddie or Fannie is referred to as a conforming loan. It falls within the size limits established by the FHFA.
When a mortgage loan exceeds these conforming limits, it is referred to as jumbo.
I know what you’re thinking. A jumbo loan is basically a really big mortgage, so it probably comes with a higher interest rate. Right? Not always.
In fact, weekly application surveys conducted by the Mortgage Bankers Association (MBA) have shown the exact opposite — at least in recent years. Their data reveal that jumbo loans often have lower rates than conforming products.
Jumbo Loans Have Lower Rates, on Average
Let’s look at the MBA’s latest weekly survey (as of the publication date). On November 15, 2017, the industry group reported the following findings:
- The average “contract interest interest rate” for a 30-year fixed mortgage with a conforming loan balance (equaling $424,100 or below) averaged 4.18% for the week.
- The average contract interest rate for a 30-year fixed mortgage with a jumbo loan balance (greater than $424,100) was 4.12% during the same week.
If you were to search their archives and look at application surveys going back several months, you would find the same trend. On average, jumbo loans tend to have lower interest rates than their smaller conforming counterparts. Surprise!
Why Is This the Case?
This might seem counterintuitive. Why would a larger mortgage loan – which would seem to be a bigger risk to the lender and/or investor – come with a lower rate? After all, lenders generally charge higher rates for riskier loans.
In short, there has been growing demand for jumbo mortgage products among investors, creating a more competitive market for these “oversized” non-conforming loans.
Here’s how Joel Kan, an economist with the MBA, explained it to CNBC:
“A strong appetite for jumbo loans and a highly competitive market has led to increased availability and lower pricing of jumbo loans over the past few years.”
But it hasn’t always been this way. A few years back, jumbo loans tended to have higher interest rates than smaller conforming mortgage products. This trend began to change a few years ago. Since around the middle of 2013, jumbo mortgage products have come with lower interest rates (on average) than conforming loans.
Other Factors That Can Influence Your Rate
The type of loan you use can affect the mortgage rate you received from a lender. As we’ve covered (thoroughly) above, jumbo loans tend to have lower interest rates than conforming. But that’s just one factor that can affect your borrowing costs.
Here are some other factors that can influence the rate you receive from a mortgage lender:
- Your credit score: These three-digit numbers are essentially an indicator risk. A lower score suggests that a person might have had trouble repaying their debts in the past. A higher score usually indicates a person who manages their debts and pays bills on time. Borrowers with higher credit scores tend to qualify for lower mortgage rates, and vice versa.
- Fixed versus adjustable: On average, adjustable-rate mortgage loans (or ARMs) tend to start off with lower interest rates than their fixed counterparts. You can see this clearly enough if you look at the weekly survey conducted by Freddie Mac. Of course, the interest rate assigned to an ARM loan can change over time, making it less predictable than a fixed mortgage.
- Discount points: Some borrowers choose to pay points at closing in exchange for a lower mortgage rate on their loans home loans. In this context, a point is equal to 1% of the base loan amount. It’s a trade-off. The borrower pays more money up front in exchange for a lower rate, which could save them a significant amount of money over time.
Disclaimer: This article answers the question, do jumbo loans have higher interest rates than conforming? This article includes data, statistics and commentary provided by third parties not associated with our company. The rate you receive on a home loan will vary based on a number of factors, including those covered above.
Brandon Cornett
Brandon Cornett is a veteran real estate market analyst, reporter, and creator of the Home Buying Institute. He has been covering the U.S. real estate market for more than 15 years. About the author