Issues with Super Jumbo Loan Rates
There are a few reasons why super jumbo loan rates are higher than conforming mortgage rates. Generally speaking there are two main reasons for such a spread between the two rates (spread refers to the difference between the two, and is how the difference is referred to in the banking industry).
One big reason is that the conforming rates are subsidized and supported by the federal government. Agency firms like Freddie Mac and Fannie Mae have the distinct role/job/goal to reduce mortgage rates and make housing more affordable to more Americans. They do this together with the FHA by either backing (via guarantees and insurance on the mortgage) or buy purchasing mortgages directly from banks. These mortgages are originated by the individual banks, then they are packaged and sold in bundles (yes, these are the same instruments that got the financial industry and world in trouble in 2008). By doing these transactions the government effectively does help keep mortgage rates lower for those homes that are defined as ‘conforming’ according to the loan limits for that year. That cut off for 2010 is $417,000 – and as such, super jumbo loans do not qualify for this assistance and support since super jumbo loans refers to loans that are higher than $650,000.
A second reason is that banks simply are taking one more risk with super jumbos than they do with cheaper homes. If a super jumbo borrower goes into default it is much harder for the bank to sell the home, increasing the risk the bank is taking and thus driving rates up even farther.
So, you do have both factors – government and higher risks for the banks – contribute to higher super jumbo rates, and as such you need to take that into consideration when purchasing a home. You may very well be smart to either 1) put more money down or 2) purchase a little smaller home so your mortgage can qualify as a conforming loan and get a better/lower interest rate on your loan.
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