Posted on Saturday, January 15, 2011
If you’re considering taking out a jumbo mortgage, now may be a good time to get the loan.
According to data released last week from LendingTree, the difference in price between a conforming 30-year fixed mortgage and a jumbo mortgage for a higher amount was recently at around 60 basis points. (A basis point is one one-hundreth of a percentage point.)
That means that, for example, if you’d pay 5.0 percent for a smaller, conforming loan, a jumbo loan would be 5.60 percent. That’s the smallest spread level relative to conforming 30-year fixed loans since mid-2007.
Technically, according to Keith Gumbinger, vice president of HSH.com, a “jumbo” mortgage is one with a loan amount above that which can be sold to Fannie Mae and Freddie Mac. Those two entities can buy only “conforming” loans. Such conforming loans carry certain credit, documentation and insurance requirements, among other factors.
In most parts of the country, he said, a conforming loan can be no larger than $417,000. But the limit is higher, and can run as high as $729,750, for a so-called conforming jumbo mortgage or “expanded conforming” loan, which is available in 71 high-cost marketplaces around the country.
This is in contrast to a nonconforming jumbo mortgage, which would be a loan for a higher amount than the local conforming limit. And that is the type of loan whose premium over conforming 30-year fixed loans has shrunk, according to LendingTree.
If you live in one of the high-cost marketplaces and have a good credit score, you could get three different rates depending on how big your mortgage is; elsewhere, you could get two different rates. Regardless of where you are, the narrower premium means that now is a particularly good time to get the higher-amount loan since its rate is closer to the lower end than it has been in a while.
“Now is probably a really good time to start looking at jumbo rates if you are somebody who has been shopping for a jumbo mortgage,” said Cameron Findlay, LendingTree chief economist, who attributed to the narrowing spread to lenders viewing the default rates in the higher-loan brackets as improving or less risky than in the lower-loan sector.
According to LendingTree’s data from loan rates available from its network of lenders, the rate for a $417,000 conforming 30-year fixed mortgage with certain lock terms (a 30-day forward rate lock) was recently 4.89 percent. In contrast, the rate for a $729,750 mortgage with the same lock terms was recently 5.49 percent, or 60 basis points higher.
According to Mr. Findlay, the spread between conforming 30-year fixed loans and conforming jumbo loans was as narrow as 30 basis points in the early part of 2007 and expanded all the way up to around 190 basis points by the end of 2008.
Since reaching a peak at the end of 2008, the spread has been declining since then but Mr. Findlay said it was unlikely to go back down to 30 basis points unless the private market started buying mortgages again.
In fact, he said the spread was more likely to widen going forward and as of Monday, it had widened slightly to 69 basis points, the lowest level since April 2010.
“I wouldn’t be too shocked to see them expand a little more, meaning jumbos will become a little more expensive over the course of the next couple months,” he said, noting that there is little confirming evidence (such as additional liquidity in the market) for why jumbos should be as low as they are relative to conforming mortgages.
According to Mr. Gumbinger of HSH.com, the spread has been in the range of the mid-to-upper 60 basis points recently, “among the narrowest gaps since the onset of the crisis” except for a few weeks in April 2010.
He also similarly predicted that rates for mortgages of all kinds, including jumbos, would most likely be higher in 2011. He attributed this largely to “an improving economy, coupled with some concerns about future inflation (not to mention the still-palpable risks of investing in residential mortgages),” he said.
He also added that “like conforming loans, jumbo prices have recently visited (and exited) record-low territory, and absent a new fiscal catastrophe, probably won’t revisit them anytime soon.”
Have you recently, or are you considering, taking out a jumbo mortgage? Why or why not?
By JENNIFER SARANOW SCHULTZ, THE NEW YORK TIMES