Mortgage Surprise: Jumbo Loans Suddenly Cheaper Than Conforming Loans

In the latest quirk of the pandemic mortgage market, rates for jumbo loans have fallen sharply below those for conforming loans. The average rate on a 30-year jumbo loan was just 3.44 percent in Bankrate’s latest national survey, well below the 3.71 percent average for conforming mortgages.

Jumbo loans rarely offer a better deal than conforming loans. From mid-2020 through mid-2021, for instance, jumbo mortgage rates on average were 0.34 percentage point higher than conforming loans. The gap got as high as nearly half a point, according to Bankrate’s survey.

However, that spread narrowed in late 2021. In 2022, things got strange: Jumbo rates crept a bit lower than conforming rates, and now they’ve widened the gap. Bankrate’s Jan. 26 survey marked the third consecutive week that jumbo rates stood more than 0.2 percentage point lower than conforming loans.

Why the reversal? Mortgage experts point to demand from the investors who ultimately buy jumbo mortgages.

“The strong demand by investors appears to have driven down the yields on jumbos relative to conventional loans, especially as the use and accessibility to jumbos has grown,” says Lynn Reaser, chief economist at Point Loma Nazarene University.

What is a jumbo mortgage?

A jumbo mortgage is a loan for an amount that exceeds the Federal Housing Finance Agency’s loan limits for mortgages that can be bought by government-sponsored entities Fannie Mae and Freddie Mac.

For most of the United States in 2022, the loan amount that divides conforming loans from jumbo mortgages is $647,200. In pricey housing markets — including much of California, all of New York City, the District of Columbia and the entire states of Alaska and Hawaii — the break point is $970,800.

Some markets fall in between. In Colorado’s Boulder County, the 2022 limit for conforming loans is $747,500. In Florida’s Monroe County, home to 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 the federal backing of Freddie and Fannie to reduce their risks. 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 enterprises that promote liquidity in the home loan market.

That explains why jumbo rates usually are higher: The lenders who make loans and the investors who buy them consider jumbo loans to be riskier than conforming loans.

As a result, jumbo loans often can be more expensive or carry more onerous qualifying requirements. And borrowers on the cusp of a jumbo loan often put down a bigger down payment to move the loan amount below the conforming loan limit. For instance, the buyer of an $850,000 home who has the luxury of cash in the bank might put down $203,000 to get a conforming loan of $647,000. For the moment, though, the same buyer might be content with a 20 percent down payment of $170,000 and a jumbo loan for the remaining $680,000.

Why are jumbo loans suddenly a better deal?

The average rate on conforming loans rose sharply in the first few weeks of January. That’s largely because of the path mortgages follow after they’re originated by lenders: The mortgages are bought by Fannie and Freddie and then packaged as investments.

“When 10-year Treasury yields rise, so too do the rates for mortgages that are being packaged into mortgage-backed securities,” says Greg McBride, Bankrate’s chief financial analyst. “Jumbo rates are less dependent on secondary market pricing because they aren’t packaged into mortgage-backed securities as often.”

What’s more, jumbo lenders tend to be quite picky about the creditworthiness of jumbo borrowers.

“The jumbo loans we are doing 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.

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