Loans insured by the government-sponsored entities Fannie Mae and Freddie Mac have long been referred to as ‘conforming loans’ because they conform to the guidelines of Fannie and Freddie. There have always been limits to the size of conforming loans, and loans above that limit have generally been referred to as jumbo loans. Currently, conforming loans in every state except Alaska and Hawaii have a limit of $417,000. In certain high-cost real estate markets Fannie and Freddie will insure loans above $417,000, up to a maximum of $625,500 depending on the area. These are generally referred to as high-balance conforming loans. Since these loans are insured by Fannie and Freddie, and thus have the implicit backing of the US government, their interest rates have generally been appreciably lower than the interest rates for jumbo loans.
In the aftermath of the real estate meltdown in 2008, Fannie and Freddie needed public funding to remain solvent, and for the first time in their history came under the supervision and control of the government. Although the public money has since been repaid in full, the government has decided to greatly diminish the role Fannie and Freddie play in mortgage lending. One consequence has been a steady decrease in the price advantage that conforming loans have always held over jumbos.
As of this writing, for most loan scenarios jumbo loan pricing is lower than that for conforming loans for borrowers with a credit score over 740 and a loan-to-value of 75% or less. This is very important when a borrower is deciding on a financing strategy. It has been the rule for years that finding a way to incorporate a conforming loan amount into a loan package would be a big positive. Often a borrower would come up with a larger down payment, or accept a home equity line, in order to keep the primary mortgage at the conforming limit. Not only is this often no longer necessary, it may be a negative.
If you are purchasing or refinancing, and your loan amount is in the conforming range, have your lender run pricing scenarios using both jumbo loan and conforming loan pricing. I recently had a cash-out refinance, low LTV and high credit score, where the borrowers rate actually dropped by one-eight of a point in interest rate when we increased the loan amount from $400,000 to $420,000.
I expect this trend to continue, and that jumbo loans will become increasingly more attractive relative to conforming.