Jumbo Mortgage Rate

There is a great deal of discussion about the historically low rates on conforming mortgage loans. For those who are looking at a larger home and require a jumbo loan, though, financing is more challenging. Luckily, debt remains available at historically attractive levels.

Freddie Mac and Fannie Mae are the quasi-governmental agencies who purchase mortgage debt in the United States and then resell it on the open market with their guarantee. Because the mortgage debt carries their guarantee, which has been proven to be effectively the same thing as a government guarantee, investors are willing to pay a great deal for it, which lowers the interest rates on loans which go through the agencies. The challenge is that they will not just buy any mortgage. The primary consideration for a loan to be considered “conforming” and eligible for purchase by them is that it must fall within limits which vary from area to area and range from a minimum of $417,000 up to a maximum of $729,750 for a single family residence in the Continental US or Puerto Rico. A jumbo mortgage is any loan which is above these limits.

Ultimately, then, a conforming mortgage is insured by the Government, but a jumbo loan is insured by either a private insurer or by the willingness or ability of the original borrower to repay the loan. Furthermore, jumbo loans are written on the most expensive properties in the market, which also introduce a high degree of risk, since the income of many of today’s wealthy is highly dependent on the economy and the financial markets. Because of this, interest rates for jumbo loans had gotten as high as 150 basis points above the prevailing rate for a 30 year conforming mortgage. In other words, when regular mortgage could be found for 5.25%, jumbo loans were being written around 6.75%.

Today, the spread has pulled back. While conforming loans finished April at an average of 5.02%, 30-year fixed rate jumbo loans has pulled back to 5.76%, which is near the record low of 5.55% that was set in 2003. These loans are able to be so affordable because the banks have tightened up their standards. The average FICO score of a borrower on a low cost jumbo loan was in the high 700’s, and loan to value ratios were quite low. Today, requirements of 20% cash down and a 750 FICO score are not uncommon for even a relatively small jumbo loan of under $1,000,000. Loans of over $2,000,000 frequently require down payments of over 30%.

For those who are adequately well-heeled to require a jumbo loan, the new requirements should not pose a significant problem. For those who are attempting to buy a moderate home in a high-cost area such as Boston, San Francisco or Aspen, and who are just barely over the conforming loan limit, there is an alternate strategy. One could take out a conforming first loan and use a second mortgage or HELOC for the remainder. This will allow a jumbo-size loan with a conforming-size payment.