Did you know –
Mortgage rates are often lower when you borrow more?
Is there a magic number for how much you should borrow to access lower rates?
In the U.S., the vast majority of mortgages are eventually sold by lenders to government agencies Fannie Mae or Freddie Mac. Those agencies set loan size limits, and they will NOT purchase a mortgage if the loan size exceeds the thresholds they’ve set. Loan amounts below their limits are considered “conforming.” Loan amounts above their limits are often referred to as “Jumbo” loans or “Portfolio” loans because banks keep the loans that they can’t sell in their own portfolios.
The standard conforming loan size limit in the U.S. is $484,350. But in high-cost areas, like New York City, Fannie and Freddie will purchase loans from mortgage lenders as long as the loan size does not exceed $726,525.
It is important to note, that the vast majority of banks and mortgage lenders serving New York City are willing to put their clients into jumbo/portfolio products as long as their loan size exceeds the standard conforming size limit of $484,350.
Have Jumbo Rates Always Been Lower than Conforming Rates?
No. And it’s not even close!
In 2009 Jumbo rates were as much as 8% higher compared to conforming interest rates. But, about halfway through 2013, the gap between jumbo and conforming rates completely closed. Now, in many instances, mortgage lenders offer Jumbo rates that are .25% – .5% lower than conforming rates.
Why Did this Happen?
There are several factors. We’ll focus on two of the biggest.
- Fannie Mae and Freddie Mac securitize mortgages (pool them together to be sold on the secondary market as mortgage-backed securities – MBS). Guarantee fees or “g-fees” are paid to MBS providers like Fannie Mae and Freddie Mac to guarantee the payment of principal and interest on their MBS. The average g-fee has almost tripled since 2010.
- Rate is always about risk. Lenders charge higher fees and rates to borrowers that come with more risk. Risk is measured by several factors including a borrower’s credit score, the amount of their down payment, and property type. The guidelines that banks put in place for their Jumbo/Portfolio products often require higher credit scores and bigger down payments. So, inherently, they are less risky.
Why is this Especially Important in New York City?
Since the average price of a Manhattan condo or co-op hovers around $1 Million, many prospective NYC buyers will obtain mortgages with balances that exceed conforming limits.
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