Historically speaking, jumbo mortgage loans have carried a higher interest rate than conforming loans. But for the first time in a long time, those rates are becoming competitive with the rates on conforming loans.

What Is a Jumbo Loan?

A jumbo loan is simply a loan for a larger amount of money than the national standard for conforming loans as set by Fannie Mae and Freddie Mac. The conforming loan cap is currently sitting at $417,000 for most areas in the continental U.S., and any loan exceeding that amount is considered a jumbo loan.

Why Are Jumbo Loan Rates Typically Higher Than Those of Conforming Loans?

Due to its larger size, a jumbo mortgage is a greater risk for an investor. To counter that risk, a jumbo loan usually carries with it a higher interest rate than a conforming loan. While jumbo loans have historically been purchased in order to finance luxury or high-end properties, skyrocketing home prices during the housing bubble made it necessary for many home buyers to apply for jumbo loans for more modest residences. When housing prices dropped and foreclosure rates climbed, many investors shied away from purchasing jumbo mortgages – and those that continued to provide them increased their interest rates.

Why Is the Rate Gap Between Jumbo and Conforming Loans Closing?

Recently, the market has seen jumbo rates that carry the same – or in some instances, even lower – rates than conforming loans depending on the loan type. With tighter lending guidelines in place, foreclosures, defaults, and late payments are decreasing, causing a surge in confidence for investors, providing them incentive to buy jumbo loans again. As a result, jumbo mortgages are seeing a comeback, and more competitive rates than before. This is good news for high-end home buyers who are seeing these rates when they seek financing.

With More Competitive Jumbo Rates, What is the Trade-Off?

Jumbo loan rates haven't necessarily dropped drastically, but the rates on conforming loans have risen since their record lows, accounting for the closure of the rate gap between the two types of loans. Jumbo loans have even tighter qualification guidelines than conforming loans, but are still obtainable by borrowers who meet all of the loan criteria

What Does This Equalizing Rate Mean?

The market for higher-end housing had been stagnating as it became more difficult to obtain a jumbo loan. But now that investors are again looking to purchase jumbo loans in the secondary market, and consumers are seeing the more competitive  rates, the market is poised to see some recovery, which is good news for buyers looking to finance more expensive properties.

It's important to remember that when it comes to mortgage interest rates, no one can predict the future. But the attractive current interest rates on jumbo loans are giving a much-needed boost to high-end home buyers.