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Jumbo Mortgage – 9/7/11 Update

Jumbo mortgage loans always have slightly higher rates than conventional mortgages. This fact stems from the refusal of the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation to buy loans above a certain amount. The amount is known as the conforming limit, and it separates jumbo loans from conventional loans. Jumbo loans cannot be sold by lenders to Fannie Mae or Freddie Mac, so they charge higher rates on these loans to protect themselves from the additional risk. Interest rates are so low that lenders can get away with charging record low rates on jumbo loans.

Over the past three years, since the Federal Reserve instituted its zero interest rate policy (ZIRP) in December 2008, interest rates have been falling like rocks. Waves of refinances have swept housing markets across the country, starting in 2008 and 2009 and continuing to the present day as homeowners seek lower monthly payments. According to Mortgage News Daily, as of September 6, 2011, jumbo mortgage rates had fallen to 4.48 percent for a 30-year fixed-rate loan. This is the lowest jumbo mortgage rates have been in years, creating a steal for borrowers who want to refinance an expensive house.

Low interest mortgage rates have another source in the low yields on government bonds. Mortgage rates, including jumbo mortgage rates, are heavily influenced by bond yields because of the secondary mortgage market. Jumbo loans are not bought by Fannie or Freddie, but there is some spillover nonetheless. The loans that Fannie and Freddie do buy are aggregated into mortgage-backed securities (MBS). They behave like other fixed-income securities, that is, their price moves inversely with their yield. As yields go down on government bonds, MBS yields fall as well, transmitting these lower rates back through the chain to banks.

A spread exists between the rate on a jumbo loan and on a conventional loan. A conventional loan currently comes with a 4.11 percent rate, per Mortgage News Daily as of September 6. The spread is thus 37 basis points, or .37 percent, reflecting low interest mortgage rates. Jumbo borrowers are in luck; they can refinance to their heart’s content, as long as they can handle the reset amortization schedule. The future holds more of the same. The Federal Reserve vowed to continue ZIRP for two more years last month. Bond yields are trading at record lows, driving down associated rates throughout the economy including the jumbo mortgage market.