Are Rates Different for Jumbo Loans Than for Conventional Loans?

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Updated on Thursday, January 24, 2019

If you’re looking to purchase a new home, you may want to know your options for mortgages that can help pay for it. There are many types of home loans that may be able to provide financial help, including “jumbo” mortgages.

But what’s a jumbo mortgage, and how are the rates?

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A jumbo mortgage is exactly what it sounds like — a mortgage that carries a large loan amount. So large, in fact, that it goes well beyond the loan limits of both the Federal Home Loan Mortgage Corporation, or Freddie Mac, and the Federal National Mortgage Association, or Fannie Mae. And because these types of loans are not backed by those two enterprises, they are also considered “non-conforming” loans, due to their varied eligibility and underwriting requirements, which depend on the lender.

Jumbo mortgages are fairly common, especially for borrowers looking to purchase larger homes located in more expensive metropolitan areas or in luxurious coastal areas. In most cases, the top limit for a jumbo loan is capped at $417,000. However, that can easily go up in more high-cost areas, such as Hawaii and Alaska, where the upper limit is set at $625,000. There are even-higher limits in more expensive markets that can reach $721,050.

How do jumbo mortgage rates work?

Rates for jumbo loans work similarly to those of a conforming loan, with both following changes in the 10-year Treasury — the benchmark that helps determine the interest rates on home loans.

Interestingly, jumbo mortgages are oftentimes considered less risky than other types of mortgages. And because of that, these loans can offer slightly lower rates, especially recently.

However, to determine the risk factor, lenders have two ways of looking at it. One is to consider the potential for a loan to go into default. In this case, a jumbo mortgage is less risky because people with these types of loans are usually wealthier, with stable and varied income, and have several assets.

Another way of looking at it: If a jumbo loan does go into default, how much will be lost? Now this could be riskier with these mortgages because the loan amount is much larger than other mortgages, creating a greater potential to lose more.

Jumbo mortgage rates today

In the past, jumbo mortgage rates used to be higher than conforming loans’, due to jumbo loans not being secured by Freddie Mac and Fannie Mae, and they ranged around 0.25% to 0.50% higher. But since the end of November 2018, this trend has seemed to shift, with jumbo mortgages offering lower rates than conforming loans.

One possible reason for these lower rates is that processing a bigger loan can be cheaper, especially when you factor in potential processing fees. If you have a conforming loan, you are likely to have a processing fee from Fannie or Freddie, but not with jumbo loans because they aren’t backed by these entities.

However, a jumbo loan can still come with fees, but they can be the same amount as with smaller loans. In this case, you’re likely to save some money.

“The same fee on a lower loan is a higher percentage on that loan, so the profit margin is smaller,” said Tendayi Kapfidze, chief economist of LendingTree, which owns MagnifyMoney. “With jumbos, a larger profit margin means the rate can be lower and still leave a good dollar profit for the lender.”

Plus, with a larger balance, there’s greater potential for the lender to earn more interest on the loan.

Jumbo vs. conventional mortgage rates

To determine the different rates among mortgages, it’s best to understand what conventional loans are. Unlike jumbo loans, these mortgages, also considered conforming loans, follow the standard requirements of both Fannie Mae and Freddie Mac. Conventional mortgages usually have both fixed terms and fixed rates.

To get a good comparison between the latest jumbo and conventional mortgage rates, let’s take a look at a recent survey from the Mortgage Bankers Association. The survey analyzed and compared the rates of these two types of loans and provided interesting results.

The interest rate for jumbo mortgages with a 30-year fixed rate and loan amount over $484,350 has decreased from 4.72% to 4.52%. This is the lowest these rates have been since February 2018. The jumbo rates were compared with other mortgage loans with similar balances, including 30-year fixed-rate conforming loans, which dropped from 4.84% to 4.74%, hitting their lowest rate level since April 2018.

The survey also showed that because these mortgage rates have dropped significantly, jumbo and other mortgage applications have been on the rise, especially in the beginning of January 2019, where we saw an increase of 23.5% over the previous week, seasonally adjusted.

Conclusion

Rates for jumbo loans may be down, making them attractive to many, but that doesn’t necessarily mean one is the right option for you. Keep in mind, jumbo mortgages are usually best-suited for those who are looking to buy in higher-cost areas who need larger loan amounts. Borrowers also will need to have substantial stable income to help cover such large borrowed amounts. It’s best to do your research and shop around to find the right mortgage loan for your financial needs, while keeping an eye on the rates.

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