A common question we receive is are jumbo mortgage rates higher than conventional loan rates? Let’s take an in-depth look at the question below and break it down.
First, it’s important to understand what exactly a jumbo loan is. A Jumbo mortgage is one that exceeds the standard conforming loan limit. Each state/county has newly published loan limits each year, but in most of the country, the limit is $766,550. Some high-cost locations are much higher, all the way up to $1,149,825. So any mortgage over this amount would be labeled a Jumbo loan.
When it comes to mortgage rates, single jumbo loans can have higher interest rates than conforming loans. This is due to the fact that jumbo loans are typically riskier for lenders for a variety of reasons. This is even more true for lower down payment jumbo loans. Conforming mortgage products are generally more secure and easier to qualify for because they adhere to strict guidelines established by government agencies such as Fannie Mae and Freddie Mac. As a result, their interest rates tend to be lower than jumbos.
However, in many cases, borrowers can get around increased jumbo rates by securing a combo piggyback mortgage. This involves obtaining two mortgages – a first mortgage at or below the conforming loan limit, followed up by a second mortgage to make up the difference. Let’s review the example below:
Homebuyer Harry is purchasing a home for $1,000,000 – he has 10% for a down payment. So his final loan amount would be $900,000 and this exceeds the conforming county limit of $766,550.
So what typically will happen is the lender will offer a first mortgage at the conforming loan limit of $766,550. Then follows up with a smaller second loan. The remaining $100,000 (10% down) would be Harry’s personal funds for the down payment and closing costs. This setup is commonly referred to as an 80/10/10 piggyback loan.
There are two key reasons to structure the loan this way. First, as mentioned above the home buyer can now take advantage of the lower conventional loan rates on his larger first mortgage because the amount falls within the limits. Second, since the buyer isn’t putting 20% down payment he would typically be required to pay monthly private mortgage insurance (PMI) That is not the case since his primary first mortgage stays at 80% loan to value (LTV) even though his combined loan to value (CLTV) is 90% The saving with just eliminating PMI is pretty big itself.
It’s also important to note there are a few drawbacks when doing a piggyback combo loan. First, the buyer will have (2) separate closing packages and will pay slightly more in closing costs as a result. In addition, there will be more paperwork to sign since there are separate liens.
Homebuyers who have questions should call or just submit the Quick Contact Form on this page, 7 days a week.