What exactly are jumbo mortgages you might wonder. Well, Freddie Mac and Fannie Mae have set a limit of $417,000 for their conforming loans. This means that they won’t purchase any loans over that amount. Why is that important you might ask. It’s important because these two lenders purchase over 50% of all mortgages in America. That means any loan over $417,000 automatically disqualifies the largest mortgage purchaser in the U.S. from considering your loan.

Due to the large size of jumbo loans they have historically been seen as higher risk than the smaller more common loans out there. This is actually a bit of a misconception though as those who can afford a mortgage of this size are typically very strong borrowers with very high credit scores, high incomes, job stability and a high net worth. In other words, they aren’t very likely to default on their mortgage.

Be that as it may, it is the perceived risk of these jumbo mortgages that make investors shy away from them. Since there is a limited number of interested purchasers, the seller of jumbo loans often needs to do something to make them more attractive to investors. As you might expect that “something” is offer a higher interest rate to the investor. Jumbo mortgage rates are directly influenced by the perceived higher risk of these types of loans. As with any investment, higher risk translates to higher return. While this is great for the investor, it is less than great for the borrower who is now required to pay a higher interest rate simply because of the size of the loan.

In addition to being perceived as high risk, jumbo mortgages also have a limited number of buyers which forces the jumbo mortgage rates to be even higher still. Lenders need the higher interest rates to attract investors who will buy these loans in the secondary mortgage market.

How much difference can you expect to see in your jumbo mortgage rates? Typically there will be a difference of 0.25-0.50% between jumbo mortgage rates and traditional mortgage rates. While this may seem like a small amount, it will add up to a significant amount on a loan this size over 30 years. That 0.25% increase will mean almost $1000 a year on a $500,000 jumbo loan.

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