If you happen to be in the market for a large loan to either buy a house or refinance your current one, you have surely been watching jumbo loan rates with keen interest.
And what you’ve no doubt seen has been shocking. Jumbo loan rates (for loans exceeding $417,000 or $625,500 in higher-priced areas) are priced lower than conventional loans (by as much as an eighth of a point (.125) or even a quarter point (.25).
This current trend goes against all norms because jumbos have traditionally cost more than conventional loans on the basis that lenders were reaching deeper into their pockets, thus taking on more risk, to lend you money. That thinking has all changed, as we’ll discuss in a moment.
If you were ever going to go big and buy a larger house than you thought you could afford, now is probably the time to pull the trigger. Jumbo loan rates are on your side, at least for now.
Why jumbos are now better deals than conventional loans
Actually, the story began few years ago, when the Federal Housing Finance Agency (FHFA), the regulator for Fannie Mae and Freddie Mac — the two quasi government-sponsored enterprises (GSEs) that buy loans from banks so the banks will continue to have new money to lend — decided that the two GSEs had too much power. So the FHFA began piling more fees onto conventional mortgages (under $417,000) that their approved banks and other lenders would sell to Fannie and Freddie.
Furthermore, the FHFA elevated the FICO levels that conventional borrowers would have to attain to receive Fannie Mae and Freddie Mac’s best pricing. For example, the new best-pricing standards were raised from a 740 FICO to 800. By comparison, in 2007, a 680 FICO score qualified for best-loan pricing.
All these actions, of course, have made conventional loans, those under $417,000, more expensive compared to jumbo loans. Jumbo pricing didn’t go up accordingly because the agencies don’t buy jumbo loans, also known as non-conforming loans. In other words, Fannie and Freddie don’t buy them because they don’t conform to their pricing standards.
Ironically, the FHFA instituted these fees even as the Consumer Protection Finance Bureau (CPFB) enacted new limits on the costs borrower can be charged to obtain loans. The CPFB limits, however, do not include fees charged by the FHFA.
Lenders abhor a vacuum
Into this void has marched a horde of revenue-hungry lenders, both banks and non-traditional lenders, who have decided that these big loans are worth keeping on their books (portfolios). The math was fairly easy for them to make their decision.Savings accounts pay average annual yields under 1 percent. By comparison, banks can earn an average 4.14 percent on a 30-year fixed-rate jumbo mortgage and 3.03 percent on a five-year, adjustable-rate jumbo mortgage (5/1), according to mortgage-information site HSH.com, as of Sept. 5.
Savings accounts pay average annual yields above 1 percent. By comparison, banks can earn an average above 4 percent on a 30-year fixed-rate jumbo mortgage and 3 percent on a five-year, adjustable-rate jumbo mortgage (5/1).
Without Fannie and Freddie telling them how to run their business, lenders have set their own jumbo lending standards, introducing looser qualification standards, including less demanding credit scores and debt-to-income ratio requirements.
All of this maneuvering has resulted in greater competition among lenders, which in turn has produced better deals for jumbo borrowers.
How to take advantage of the new lending playing field
If you’re in the market for a jumbo loan, you currently have the wind at your back. Knowing current lender enthusiasm for jumbo loans, you should be able to shop around and negotiate fees, resulting in even more savings. Again, lenders have the flexibility to make these deals because they don’t have to conform their loans to Fannie and Freddie’s more stringent standards.
At the same time, to take advantage of this rare time when jumbo rates are pricing lower than conventional loans, make sure you have all your paperwork in order. For example, in hot housing markets like San Francisco, you should consider getting not only your mortgage pre-approved, but also pre-underwritten by a lender to prevent your home-purchase deal from falling out because of a documentation delay.
Meanwhile, if you’re a jumbo borrower considering a refinance, you should pore over your financial profile from head to toe, including how long you plan to stay in your home, how long you expect to keep your current job, your retirement plans and investment situation. Because of the large amount of money involved, you should seek advice from both a lending professional and an investment or wealth adviser.
How long can these favorable jumbo loan rates last?
The jumbo market was just $103 billion in the first half of 2014, compared with $332 billion in the first six months of 2003, the biggest year on record. But lenders have again awakened to the profit-making potential of jumbo loans. This new competitive jumbo loan landscape will likely keep a lid on jumbo pricing relative to conventional mortgages.
“How long this will last is hard to say,” Sorgenfrey said. “As long, I presume, as values and incentives stay strong and higher-income buyers stay in the market. Move-up buyers, who are usually bringing in a large down payment, also are adding to the allure of jumbo loans for lenders. These ‘hedge-fund’ type sources also have a ton of cash and will keep coming in the market as long as values hold.”
Bottom line, it’s a good time to be shopping for a jumbo loan to finance the purchase of a higher-priced home or to refinance your current one.