Conforming vs. Jumbo Rates
Mortgage loans are categorized into three groups to determine interest rates: Conforming, High Balance Conforming and Non-Conforming or Jumbo.
The rates that you see published by the media usually pertain to “conforming” loans. These are loans that meet the criteria set forth by the two Government-owned agencies known as Fannie Mae and Freddie Mac plus HUD which insures FHA loans. These rates apply to loan amounts of $424,100 or less. Loans sold to these agencies by lenders account for nearly 90% of all mortgage financing in the U.S. today. They are called “Conforming” loans because they conform to the guidelines established by these governmental agencies.
Interest rates for Conforming loans are determined by the supply and demand for Mortgage-Backed Securities (MBS’s) which are traded in the financial markets all day long just like stocks and bonds. Therefore, the rates or cost for these types of mortgages change every day and throughout the day. Neither the Fed nor Lenders set these rates.
High Balance or Super Conforming Loans
These are loans also governed by Fannie Mae, Freddie Mac and HUD but they allow larger loans in designated “High-Cost” markets. The limit in Orange and Los Angeles Counties is $636,150. Interest rates for these loans work in the same manner as rates for the smaller conforming loans described above with the exception that loans between $424,100 and $636,150 are slightly higher in rate than loans of $424,100 or less. Again, the rates are changing all the time and are not set by the Fed or by individual lenders.
Non-Conforming or Jumbo Loans
This category describes loan amounts above $636,150 that are not saleable to Fannie Mae or Freddie Mac or insured by FHA. Accordingly, there are far fewer lenders offering true jumbo loans. In general, the underwriting criteria and guidelines are stricter than they are for Fannie Mae/Freddie Mac/FHA and each lender is free to set their own rates and terms. Interest rates are slightly higher than they are for the loan amounts of $636,150 or less. Jumbo lenders also may adjust rates daily.
How to Finance More Than the Conforming Limit and Still Get the Low Rate
Suppose you need to finance $800,000 yet you want the High Balance Conforming Rate? Sometimes we can use what we call a “Piggy-Back” loan where we make a first mortgage for say $636,150 and simultaneously close a Home Equity Line of Credit (HELOC) for the rest – in this example $163,850.