Do Jumbo Loans Have Higher or Lower Rates Than Conforming?

Key highlights from this article:

  • Sometimes jumbo loans have higher mortgage rates than conforming.
  • Other times, they can offer a lower average rate for borrowers.
  • It partly depends on the demand from investors, which can change.
  • So far in 2021, jumbo loans have higher average rates than conforming.

Home buyers tend to have a lot of questions about the differences between jumbo and conforming mortgage loans. One of the most common questions has to do with the mortgage rates assigned to these products.

We are often asked: Do jumbo loans have higher or lower mortgage rates than their smaller conforming counterparts?

Most of the time, jumbo loans (defined here) do have higher mortgage rates than conforming products. That’s because they represent a larger risk to the lender and/or investor.

But that’s not always the case. Back in 2017 – 2018, for example, jumbo loans had a lower average mortgage rate than the smaller (and more common) conforming products.

When this article was published, during the first week of March 2021, jumbo loans had a higher average mortgage rate when compared to conforming. This shows how it can vary over time.

The Difference Between Jumbo and Conforming

We will talk about why jumbo loans often have higher mortgage rates in a moment. But first, we should clarify the terminology being used here:

  • A conforming loan is one that meets the size requirements and other criteria established by the Federal Housing Finance Agency. These loans meet or “conform” to pre-existing criteria. As a result, they can be sold into the secondary mortgage market through Fannie Mae or Freddie Mac. Conforming loan limits vary by county because they are based on median home prices.
  • A jumbo loan, on the other hand, has a balance that exceeds the conforming limits for the county where the home is located. It does not meet or conform to the size limits established by the FHFA. These mortgage products cannot be sold to Fannie Mae or Freddie Mac. Instead, they are often sold to investors in the private-label secondary mortgage market.

Now we are getting to the interest rate part of this story. While mortgage rates are influenced by a variety of factors, risk is at the top of the list. Generally speaking, a “riskier” loan will be charged a higher mortgage rate — and vice versa.

There is a demand component as well. Jumbo loan mortgage rates can be heavily influenced by the amount of demand from investors. So let’s talk about that next.

How Investor Demand Influences Mortgage Pricing

You will recall from above that a jumbo loan is too big to be sold into the secondary mortgage market through Fannie Mae or Freddie Mac.

Because of this, mortgage lenders either have to keep those “non-conforming” loans in their portfolios (which can be risky) or sell them to private investors.

But the demand from investors is constantly shifting. Sometimes there is a high level of demand for jumbo mortgage products, among investors. Other times, the demand might drop considerably.

When there’s not a lot of demand for jumbo loans, mortgage lenders tend to charge higher mortgage rates for those products. They do this to offset the increased risk of being “stuck” with a non-conforming mortgage loan, among other reasons.

Remember, jumbo loans that exceed the county-level size limits are not eligible for securitization through Fannie Mae or Freddie Mac. They can be securitized and sold via the private-label secondary market. But generally speaking, there is less demand (and therefore less liquidity) for jumbo loans since the credit risk is not insured by any government-backed agency.

The bottom line here is that an increase in demand for jumbo loans tends to result is lower mortgage rates for borrowers, while the opposite is true as well.

So there isn’t a clear-cut, yes-or-no answer to the question: Do jumbo loans have higher interest rates? It varies based on current market conditions.

Jumbo Loans Sometimes Have Higher Rates

As of early 2021, the average rate for a jumbo loan was quite a bit higher than the average for a smaller conforming mortgage. That’s a common tend we’ve seen over the past year or so, and it could continue for the foreseeable future.

Consider the difference:

  • According to the weekly application survey conducted by the Mortgage Bankers Association (MBA), the average rate for a 30-year conforming loan during the first week of February 2021 was 3.23%.
  • During that same week, the average rate for a 30-year non-conforming / jumbo mortgage was 3.33%.

In this real-world example, the average rate assigned to jumbo loans was ten basis points (0.10%) higher than the average assigned to conforming mortgages. In industry lingo, this difference is known as a “rate spread.” Sometimes, the spread can be even greater, with jumbo loans rising even higher above their conforming counterparts.

But it wasn’t always this way. In 2017 – 2018, for example, the demand for jumbo loans increased considerably. During much of those years, the secondary market shifted its focus to buying non-conforming products. As a result, the average interest rate for jumbo mortgage loans dropped below that of the conforming products.

The point of this little history lesson is to show how changing trends and market conditions can affect the “rate spread” between different types of home loans. Sometimes jumbos have higher rates … sometimes they’re lower. It varies due to a number of factors, including investor demand.

Other Considerations For Mortgage Shoppers

Mortgage rates are an important consideration for anyone shopping for a home loan. And generally speaking, jumbo loans tend to have higher interest rates than conforming (on average).

But there are other important factors to consider as well.

In addition to sometimes having a higher rate, jumbo loans tend to have stricter qualification criteria for borrowers. The reason for this is somewhat obvious. A larger loan carries a higher level of risk to the lender, especially if they are unable to sell it into the secondary mortgage market. To offset this increased risk, lenders often impose more stringent requirements.

Banks and mortgage lenders often require larger down payments for borrowers who are seeking a jumbo loan — compared to those who use the smaller conforming products. Credit score requirements can be higher as well. You’ll also have to document your ability to repay the loan, on top of your other recurring debts.

Summary and Conclusion

We’ve covered a lot of information in this article, so a recap is warranted. Here are some of the key points to take away from this:

  • Jumbo loans often have higher mortgage rates than conforming mortgage products.
  • But it doesn’t always work that way. Sometimes jumbo loan rates dip below their conforming counterparts, on average.
  • Investor demand is one of the main factors that can influence this.
  • When the demand for jumbo products is high, lenders will often lower their rates to generate more loans that they can sell to those investors.
  • When that demand “dries up,” banks and lenders tend to increase their jumbo loan rates to compensate. They no longer want to originate as many of those products.
  • At the start of 2021, the average rate for a jumbo mortgage loan was higher than the smaller conforming-range products.
  • Given current trends within the mortgage industry, jumbo loans could have higher rates throughout much of 2021.

Disclaimers: There are many different factors that can influence the interest rate you receive from a lender. Your credit score, the size of your down payment, and the type of loan you choose can all influence your mortgage rate. Economic conditions and investor demand also play a role. Every lending scenario is different because every borrower is different. So parts of this article might not apply to your situation.