Mortgage Rates – Jumbo Loans

Mortgage rates are very near all-time lows in the history of the mortgage market when it comes to conforming/conventional mortgages. Even though mortgage rates are very low consumers wonder why jumbo mortgage rates while still very low as well are always higher than conforming/conventional mortgage rates. For example, on the date of this post the mortgage rates in Houston, TX for a 30 year fixed-rate conforming mortgage is 4.500% while the mortgage rates for a 30 year fixed-rate jumbo mortgage is 5.125% or a difference of just over half a point between the two mortgage rates in Houston, TX.

There are really three fundamental reasons why jumbo mortgage rates are a little higher than conforming mortgage rates. They are supply/demand, risk, and the use of secondary markets which all determine both conforming mortgage rates and jumbo mortgage rates. We will look at each fundamental reason and how it influences both conforming mortgage rates and jumbo mortgage rates.

Supply/demand as may of you learned in Economics 101 is what drives the price of any product, commodity, or service including both conforming mortgage rates and jumbo mortgage rates. The dollar amount to detemine if you getconforming mortgage rates or jumbo mortgage rates is $417,000. Any loan amount under this number and you get conforming mortgage rates and nay loan amount above this number and you get jumbo mortgage rates.

Since more people can afford homes that cost less it makes sense that there would be a greater supply of loans under $417,000 which means there are a greater supply of conforming mortgages. A greater supply will almost always correspond to a lower price or in this case lower mortgage rates. Conversely, since fewer people can afford more expensive homes that have a mortgage amount over $417,000 there are fewer jumbo loans and thus with a smaller supply you will have higher jumbo mortgage rates as compared to conforming mortgage rates.

The next factor that causes jumbo mortgage rates to be higher than conforming mortgage rates is risk. If it was your money would you rather finance 5 homes with each having a $100,000 mortgage or finance just one home with a $500,000 mortgage. Obvioulsy you’d rather spread your rsik of possible default over 5 borrowers/mortgages versus “putting all your eggs in one basket” and have all your risk in one borrower/mortgage.

The banks and lenders do the same above analysis. They would rather have more smaller mortgages than fewer larger mortgages. The key to making a profit is risk management. The only way that banks can manage the risk of jumbo mortgage is for them to offset it with higher mortgage rates.

The final factor that makes jumbo mortgage rates higher than conforming mortgage rates is the secondary market. When banks make a conforming mortgage they have the ability to sell it off in the secondary market to Freddie-Mac and Fannie-Mae. They don’t have to carry the mortgage on their books.

On the other hand, when a bank makes a jumbo mortgage there is no secondary market. They must keep the loan on their books. Since the amount of loans you can make is tied to the amount of deposits in the bank, the bank can only make a finite amount of jumbo mortgages. Since they must carry that loan until it is paid off they have to charge higher mortgage rates on these loans to offset their cost to carry the mortgage loans on their books.

Banks make money by turning the amount they have to lend quickly. When they make a mortgage they cannot make money turning the loan so they have to make their profit through higher mortgage rates.

In conclusion even though mortgage rates are really low right now jumbo mortgage rates for the above reasons will always be slightly higher to conforming mortgage rates.

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