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A Buying Opportunity for Jumbo Mortgages?

Jumbo mortgage rates are always higher than conventional fixed-rate loans. Lenders are more conscious of the risk attending loans that are larger than the standard set by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Borrowers who apply for jumbo loans are charged a higher rate because the lender cannot sell them. Even in the current low-rate environment, jumbo loans are more expensive in terms of interest rates than conventional loans.

As of September 12, 2011, a conventional 30-year fixed-rate loan rate was 4.07 percent. A jumbo 30-year fixed loan rate was 4.39 percent, a difference of 32 basis points or 0.32 percent. The 15-year conventional fixed-rate loan sported a rate of 3.31 percent. The 15-year jumbo loan had a rate of 3.36 percent, a difference of five basis points or 0.5 percent. These current mortgage rates jumbo the most favorable borrowing costs for buyers in decades. No one seems to be taking the cue from the jumbo loan mortgage rate.

Despite fantastically low mortgage rates jumbo, buyers are not taking out these loans with the enthusiasm that they previously did. The higher interest rate may serve as a large enough deterrent when compared to conventional rates. Another reason is fear of declining home prices, which are continuing to eat away at the value of existing properties. The continued and pronounced fall in property valuations is also creating more problems for homeowners in negative equity, who have a mortgage balance greater than the worth of their home.

Low interest rates throughout the economy, including low yields on government bonds, low rates on mortgage-backed securities and low interest rates on savings accounts, are all the result of the Federal Reserve. Zero interest rate policy (ZIRP) is creating the most favorable conditions for real estate borrowing in generations. The issues mentioned in the preceding paragraph are not easily surmountable however.

The Federal Reserve has pledged to continue ZIRP for another two years into mid-2013. This will maintain the downward pressure on interest rates enough to keep them at current levels. Given recent trends in mortgage rates, new record lows may be reached in the coming months. Borrowers will face incentives to refinance and buy new properties, but the current dismal conditions may stay their hand. Jumbo mortgage rates will follow the trend and fall to new lows, but probably not far enough to convince new buyers.