There are a lot of myths in mortgage lending and real estate. You must have a 20% down payment. False. You can’t purchase a home if you already have a significant debt load. Wrong. It’s always better to purchase a home than to rent. Not entirely.
Here’s another:
The interest rate on jumbo loans is always higher than conforming loans.
The truth is, jumbo loans can have high interest rates, but over the past few years there has actually been a trend for jumbo loans to have lower interest rates than conforming loans.
The market for these loans has actually been quite competitive, and this has led to a reduction in interest rates as lenders compete for business in the jumbo-loan sector.
A Mortgage Myth Busted: Jumbo Loans Don’t Always Have Higher Interest Rates
What is a Jumbo Loan?
Before we go any further, let’s back up a step and make sure we have a firm understanding of jumbo loans. These are simply loans that exceed the limits set by the Federal Housing Finance Agency, or FHFA. (Not to be confused with the Federal Housing Administration, or FHA.) These limits are set by the FHFA and used by Fannie Mae and Freddie Mac to determine what loans they will purchase on the secondary market. If a mortgage loan exceeds this limit, it is considered a jumbo loan and will not be backed by any government organization.
Jumbo loans are larger than normal, which means the lender is taking on greater risk. You might reasonably assume, therefore, that these loans would have higher interest rates to compensate for the increased financial risk. That might be true, but it’s not the case with every jumbo loan.
Jumbo Loans, On Occasion, Have Lower Rates!
According to Bankrate, 30-year fixed-rate jumbo mortgages averaged 4.15% throughout most of 2017, which was the exact same rate, they say, as the rate for conforming mortgages. Just five years earlier, says their report, the rate for jumbo loans was more than half a percent higher than the rates for conforming loans.
This trend is repeated by numbers from the Home Buying Institute, which says that the average interest rates in November of 2017 for conforming loans was 4.18%, while jumbo loans have an interest rate of 4.12%.
Even current, up-to-date information is showing this trend. As of writing this article (Sept. 20th, 2018), the rates posted by Wells Fargo indicate not just a subtle difference, but a significant difference in interest rates between conforming and jumbo loans. According to their data, a conforming 30-year fixed-rate loan has an interest rate of 4.75%, while the same loan as a jumbo has an interest rate of 4.5%. A conventional 7/1 adjustable-rate mortgage has an initial interest rate of 4.25%, while a 7/1 adjustable jumbo loan has an interest rate of 3.875%.
There are other examples of mortgage products that have the same interest rates between conventional and jumbo. As Wells Fargo’s numbers show, the interest rate on both conventional and jumbo 15-year fixed-rate loans is 4.25%.
We’ve just given you three examples, supported by authority sources, of jumbo loans having lower interest rates. In fact, of the four comparable loan types cited by Wells Fargo that were offered in both conventional and jumbo, two had the same rate, while two had better rates on the jumbo loan; none had lower rates for the conventional!
Clearly the idea that jumbo loans will always have higher interest rates than their conventional counterparts is pure myth.
Why is this Trend Occurring?
It seems strange that jumbo loans, which are not supported by Fannie Mae, FHA, and other institutions, would have lower interest rates. After all, support from the federal government and government-backed corporations helps reduce risk; lenders often charge higher interest rates to compensate for higher risk.
The reason for this trend is simple: market competition. Right now, there is higher demand for jumbo loans, both from borrowers and lenders. The economy appears to be on the upside, and buyers and lenders alike are regaining confidence, both in the long-term economy, as well as a borrower’s ability to repay a loan in the near and distant future.
It hasn’t always been this way. Just a few years ago, jumbo loans usually had higher interest rates than smaller loans that conformed to the national standards. But as the real estate market has begun to rebound, and lending confidence is returning, we have seen more lenders willing to offer jumbo loans, to the point where they are actively seeking and competing for jumbo-loan customers.
There is also growing desire among investors to hold jumbo mortgage products which, due to the higher amounts, bring higher profits. Even when the interest rate is lower, lenders stand to earn more total dollars in return if they loan out, say, $600,000 as opposed to $200,000. This potential for longterm profitability has made jumbo loans a desired product among lenders, so to attract more customers, the rates on jumbo loans have steadily declined.
How to Further Decrease Your Interest Rate
So we’ve busted the myth that all jumbo loans have high interest rates, but what if you want to decrease your rate even further? A lot will depend on the lender and the type of loan you choose, but there are strategies that you can use to decrease your rate.
For example, you can try to raise your credit score, which will have a profound impact on the amount and terms of available loans. While you should never make unwise financial decisions simply to raise your score (such as purchasing unnecessary items just so you can make payments), you should maintain timely payments and a manageable debt load to ensure the best possible score.
You may also get a lower interest rates by using discount points, bringing a large down payment, having a reduced debt-to-income ratio, and other strategies.
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If you want more information on interest rates, jumbo loans, or other mortgage myths, please contact our team! We’ll use a common-sense approach to increase your chances of loan approval!
