Jumbo or non-conforming mortgages those that are too large to be bought or guaranteed by the government-sponsored enterprises (GSEs) Fannie Mae or Freddie Mac. Loans that can be traded by the GSEs, called conforming loans, have maximum sizes ranging from $417,000 in most of the country to $729,750 in the most expensive housing markets.
Jumbo Mortgage Rates Have Spiked
In the past, rates on jumbo loans were only a little higher than those on conforming mortgages, usually about half a percent. But that was when there were investors willing to buy those mortgages. Today, if the government doesn't back it, no one wants it, and jumbo rates have shot up to about 1.5% higher than conforming rates, according to Mortgage News Daily's survey of offered mortgage rates. To get the best mortgage rates on adjustable jumbo financing, many borrowers choose 5/1 hybrid ARMs (adjustable-rate mortgages), which provide a fixed rate for five years before converting to an adjustable rate.
Lower Mortgage Rates for Jumbo Loans?
However, jumbo loan investors are slowly coming back to the market. Since the start of 2010, mortgage lenders including Bank of America, Wells Fargo, and U.S. Bank have become more active in marketing and originating jumbo mortgages. In mid-April 2010, Redwood Trust, Inc. announced plans to issue about $222 million in bonds backed by jumbo mortgages underwritten by a unit of Citigroup. Analysts expect that if Citigroup can get enough investors to buy the securities, more such issues will follow, and rates on jumbo mortgages may begin to come down as more money becomes available to finance them.
Jumbo borrowers shouldn't automatically expect to see the lending floodgates open, however. To get the best mortgage rates, borrowers will still need lots of equity or big down payments (usually 20% to 25% or more for second homes, very expensive homes, or investment properties), extremely strong credit histories, and solid application packages (stable income, substantial reserves, etc.).