Jumbo’ mortgages now cheaper than smaller loans

Real Estate

Jumbo’ mortgages now cheaper than smaller loans
 
NEW YORK – July 1, 2016 – Banks will give you a better interest rate if you buy a more expensive and, presumably, bigger home.

The interest rate on a 30-year jumbo loan currently stands at 3.71 percent – a notch below the rate for a "conforming" mortgage, which weighs in at 3.73 percent, says Greg McBride, senior vice president and chief financial analyst for Bankrate.

The lower rate on jumbo mortgages is a reversal from the typical trend over the years, in which banks have charged higher interest rates for larger loans on the theory that they are inherently riskier.

However, the two rates "have gradually compressed over a couple of years," McBride notes. "About 12 months ago, they flipped."

Jumbo rates spiked during the Great Recession, rising to more than 1.5 percentage points higher than conventional, conforming loans before settling out one percentage point higher around 2011, according to HSH, an online mortgage resource site.

While smaller, conforming loans are backed by federal mortgage giants Fannie Mae and Freddie Mac, jumbos are not, which makes them inherently riskier to banks. However, conforming loans have become relatively more expensive for banks to offer. That forces them to charge somewhat higher rates compared to jumbos.

Bankers have also determined that while jumbo loans may be bigger, the more affluent homebuyers who take out jumbos are better bets overall, with lower default rates. As a result, lenders feel less pressure to include the cost of future foreclosures in the cost of a jumbo mortgage.

Source: Boston Globe (06/28/16)