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Where Will Jumbo Loan Rates Head Next Week?

The rate of interest is perhaps the most important price in any economy. Interest rates are the price of money, directing the flow of money from labor to capital and back again. In the mortgage market, interest rates are the price of borrowing a certain amount of money. Jumbo loans have higher rates than conventional loans because they are not eligible to be bought by Fannie Mae and Freddie Mac. Lenders expect higher risk with jumbo loans so they charge higher rates. The spread between jumbo loan rates and conventional loan rates usually remains constant.

As of September 26, 2011, the conventional 30-year fixed-rate loan stood at 3.96 percent. The jumbo 30-year fixed-rate loan stood at 4.18 percent, a difference of .22 percent or 22 basis points. Unfortunately, there are no weekly surveys of jumbo mortgage rates so the previous week’s rates have to be inferred from the spread. The week ending September 15 saw the conventional 30-year fixed rate loan at 4.09 percent. This represents a decline of .13 percent or 13 basis points from last week. If the 22 basis point spread holds, it can be inferred what the jumbo loan rates were doing last week by adding .22 percent to the previous week’s conventional rate.

This yields a rate of 4.31 percent. There is tremendous downward pressure on mortgage rates, which is producing these record-breaking lows. The Federal Reserve’s zero interest rate policy (ZIRP) in addition to two rounds of quantitative easing (QE) have created lower interest rates in long-term government notes and bonds. The 10-year and the 30-year are trading at record lows. The 10-year bond is used as a benchmark for mortgage rates because the average duration of a 30-year mortgage is actually only seven years as homeowners refinance or move.

Since the Federal Reserve announced Operation Twist, a plan to sell short-term securities to buy longer-term securities, mortgage rates have been in free fall. However, some unusual price action in the bond market has been seen recently. Bond yields on the 30-year and the 10-year have been rising the previous two days. This has put upward pressure on both the conventional and jumbo 30-year fixed-rate loans. The conventional 30-year has risen by three basis points and the jumbo 30-year has risen by four. This could imply higher jumbo mortgage rates in the next week as the bond market works out this latest movement in prices.