For the past several decades, conventional mortgages have come with a cheaper price tag than “jumbo” mortgages – those above the conventional loan limits, currently set at $417,000. That trend has now reversed itself as the housing market makes an unbalanced recovery with lenders now catering heavily to jumbo loan borrowers.
The average rate on a 30-year fixed rate conventional mortgage is 4.48 percent, excluding fees according to Bankrate.com. While conventional rates have traditionally been between 0.2 and 0.3 percent lower, jumbo loans are now averaging a rate of 4.47 percent.
The lower rates are reflective of overall home sales. Over the past 12 months, sales of home over $1 million have jumped 7.8 percent, according to the National Association of Realtors. Bank of America reported that during the first quarter of this year, 37 percent of all the mortgages they’ve made were jumbo loans, a significant increase from only 22 percent last year at the same time.
In contrast, the NAR says overall home sales have fallen 7.5 percent in the past year as soaring prices have kept many middle-class buyers out of the market.
So since jumbo borrowers are the ones who are moving the market, that’s where lenders are concentrating their efforts, trying to woo customers away from their competitors with attractive interest rates.
Another contributing factor to the rate situation is the government-takeover of Fannie Mae and Freddie Mac. The two institutions guarantee conventional mortgages, which used to make them more appealing than jumbo loans that have no such guarantee. Yet during the financial crisis, the government rescued both Fannie and Freddie when they faced bankruptcy. Since being in government conservatorship, the companies have had to raise their lender-paid fees for guaranteeing mortgages and lenders have simply passed on those costs to their customers, effectively raising rates.
The rate disparity between conventional and jumbo loans will likely continue to grow until incomes for the middle-class start increasing again. Until then, they won’t be able to come out in force in the housing market.