Is a jumbo mortgage better than a conforming home loan?

Craig BerryThe Mortgage Reports Contributor

What is a jumbo mortgage?

When you finance expensive property, you need a jumbo mortgage. You’ll have to play by different rules, because mortgages for high-priced homes are not standardized.

While a loan that meets guidelines established by Fannie Mae or Freddie Mac (a so-called “conforming” home loan) can be easily sold to investors, a mortgage that exceeds $453,100 is considered “non-conforming.”

Also known as a jumbo mortgage, this home loan plays by its own rules.

Verify your new rate (Aug 20th, 2018)

Jumbo mortgage financing: it’s back

During the mortgage crisis a few years ago, jumbo loans all but went away. The ones that remained came with guidelines that were nearly impossible for homeowners to meet.

High down payments, high interest rates, and high credit standards made jumbo loans almost obsolete.

But as the real estate market steadily recovered, jumbo loans re-entered the lending landscape.

In fact, homebuyers in the market for a larger loan may be pleasantly surprised to know that jumbo mortgage rates are nearly as low as conforming rates.

Conforming rates vs jumbo mortgage rates

Jumbo loans typically carry higher interest rates than conforming mortgages.

Jumbo mortgage rates are back, however, and they are looking good!

In the bad old days, the difference between conforming mortgage rates and jumbo rates ranged between half a point to two full points.

These days, however, the spread between jumbo rates and conforming rates is minimal — about 1/10th of a percent, according to one national survey. 

As of this writing, in Atlanta, you can find both jumbo and conforming 30-year fixed mortgages offered at 4.375 percent.

Look at jumbo ARMs

ARM rates can be over one percent lower than fixed-rate jumbo loans. For borrowers with larger loans, ARMs are popular alternatives.

That’s because with bigger balances, the effect of a lower interest rate on what you pay each month is more pronounced.

In addition, jumbo ARM rates can sometimes be lower than their conforming counterparts.

Many jumbo ARMs are not sold to investors, but are instead held by lenders on their own books. These “portfolio” mortgages can be made according to whatever guidelines and pricing the lenders establish.

The market is much less homogeneous, and the smart shopper can often find a bargain with a lender trying to expand its market share or build up its pipeline.

Jumbo ARMs come with introductory periods in which their rates are fixed. You can find loans fixed for three, five, seven, or ten years.

If you don’t keep your mortgage for more than the introductory period, you’ll never even have to deal with rate adjustments.

Verify your new rate (Aug 20th, 2018)

Compare and shop jumbo mortgage rates

Unlike conforming mortgage rates, which typically differ by .25 to .5 percent between competitors, jumbo mortgage rates can vary largely from one lender to the next.

Jumbo lenders can serve different markets — alternative documentation, non-prime, unorthodox properties, or borrowers with big down payments and perfect credit — and that affects the rates charged.

This means that when conforming mortgage rates are higher, jumbo rates don’t necessarily follow that the same path.

It definitely pays to shop and compare.

Unlike smaller mortgage loans, a half percent difference in the interest rate on a $700,000 loan amount can add up over time.

  • $700,000 at 4.375% = $3,495
  • $700,000 at 4.875% = $3,704

The difference between these two scenarios adds up quickly. Over five years, $209 per month saves over $12,500.

When conforming loan rates are lower

When conforming rates are significantly lower than jumbo rates, consider a “piggy-back” mortgage. This combination of a conforming first mortgage and a small second mortgage may save you money.

You can determine your savings potential by calculating the “blended rate” of the combined loans.

For instance, if you paid 4.0 percent interest on a $453,100, and 5.0 percent on another $25,000 loan, your blended rate is 4.06 percent. If jumbo rates are higher than this, the piggyback will save you interest.

Here’s how the calculations look:

  • First, you add the loan balances together to find the total of all loans. In this case, that’s $449,100.
  • Next, you divide each balance by the total. In this case, $424,100 / $449,100 is 94 percent.
  • Multiply the interest rate of each account by its proportion (percent of total). That gives you an adjusted or weighted rate for each account.
  • Finally, add all of the weighted rates together. That’s your blended rate.

jumbo mortgage

What are today’s jumbo mortgage rates?

Today’s jumbo mortgage rates are at historic lows. In recent months, the average jumbo mortgage rate is on par with conforming rates.

If you are in the jumbo loan market, you should shop and compare all of your options before deciding which is best.

Verify your new rate (Aug 20th, 2018)