Consumers who are purchasing a home in a high cost of living area or who will be purchasing a luxury or high-end home should become familiar with jumbo mortgages and conventional mortgages. Jumbo mortgages are similar to conventional loans, but they give the consumer a higher amount of money, otherwise known as the principal. Jumbo mortgages are typically for amounts of $417,000 or higher, but banks can set their own thresholds for these types of loans.
Looking at any mortgage rates chart will show that jumbo mortgage rates are higher than those for conventional mortgages. This is largely because a jumbo mortgage typically represents a higher level of risk for the bank. Jumbo loans are not backed by the federal government, and the ability of the borrower to make the payments is dependent on him or her keeping a high paying job. Historically, while the level of default is comparable to that of conventional loans, these loans are typically refinanced at a higher rate than conventional mortgages. Refinancing means that a bank will not make the full amount of their expected investment.
Secondly, issuing a jumbo mortgage means that a large portion of the bank’s money is tied up in one asset. In the event of a foreclosure, the bank will probably lose a larger portion of its money than it would with a conventional loan. Selling a property bought with a jumbo mortgage also means that the bank will have higher carrying costs since these properties must be maintained, and the bad loan will sit on the bank’s books for longer than a conventional loan.
Because of these reasons, jumbo mortgage rates are typically slightly higher than the rates for their conventional loan cousins. Looking at a mortgage rates chart which shows rates over the past forty years shows that these loans have always been more expensive than conventional loans. In recent years, there has also been a trend for banks to ask for at least a 20% down payment from borrowers seeking these loans. According to the mortgage interest rates history, this practice fell out of favor from 2000 to 2005, but has been a typical requirement over the past several decades. Banks are also requiring proof of income, something which has proven difficult to provide for many self-employed people seeking jumbo mortgages.