Is a Jumbo Loan Right for you?

Large-balance mortgage loans called “jumbo” loans are becoming less expensive than conforming loans. Traditionally, jumbo loans have carried higher interest rates, but since mid-2013 that has been gradually changing. Jumbo loan rates have been less expensive to borrow than a conforming mortgage loan by an average of 33 basis points during the first quarter, according to CoreLogic, a real estate data firm, on its Insights Blog.

In response, jumbo loans have been growing. The share of jumbo loans has reached its highest rate since 2009 at about 15 percent of home-purchase origination, CoreLogic reports. For comparison, in 2009, the jumbo share was just 6 percent.

Jumbo loans are those that exceed the high-balance conforming loan limit, which the Federal Housing Finance Agency set at $453,100 for most of the U.S. in 2018. Areas designated as high-cost may stretch up to $679,650.

CoreLogic researchers say one of the reasons that the jumbo-to-conforming rate difference has seen the gap decline is the increase in guarantee fees, also known as g-fees. These are fees on loans bought by Fannie Mae and Freddie Mac for conforming and high-balance conforming loans. The average g-fee has nearly tripled since 2010, jumping from 22 basis points to 57 basis points in 2017.

“Since jumbo loans are too big to be purchased by Fannie Mae and Freddie Mac, those fees have little or no impact on the note rate of the jumbo loans,” CoreLogic notes on its Insights Blog. “Fannie Mae and Freddie Mac are pricing the credit risk of conforming loans, while banks are pricing the credit risk of jumbo loans. Thus, increase in guarantee fees has the effect of raising interest rates for conforming loans with little or no impact on the mortgage rates for jumbo loans.”

Researchers also note that lenders are requiring higher credit standards to get a jumbo loan, which has lowered the credit risk to lenders and given them more incentive to issue them. The average credit score for buyers with a 30-year fixed-rate jumbo loan is 18 points higher than for buyers with conforming loans.