Ask the Expert – Rick Cirelli

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Conforming vs. Jumbo Rates

Last week I wrote about the weekly survey of mortgage rates published by Freddie Mac and reported by the media. From the calls and emails that I received I can tell that there is some confusion concerning the types of loans and interest rates so I thought I would elaborate a little further this week.
Basically, mortgage loans are categorized into three groups which determine interest rates: Conforming, Super-Conforming and Non-Conforming or Jumbo.

Conforming Loans
The rates that you see published by the media always pertaining 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 oversees FHA loans. These rates always pertain to loan amounts of $417,000 or less. Loans sold to these agencies by all lenders account for 99% 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 for these types of mortgages change every day and throughout the day. Neither the Fed nor Lenders set these rates.

Super-Conforming Loans or High-Balance Conforming Loans
These are loans also governed by Fannie Mae, Freddie Mac and HUD but they allow larger loans in certain designated “High-Cost” markets. The limit in Orange and Los Angeles Counties is $625,500 – recently reduced from $729,750. 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 $417,000 and $625,500 are always about .25% higher in rate than loans of $417,000 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 $625,500 that are not saleable to Fannie Mae or Freddie Mac. 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 and each lender is free to set their own rates and terms. However, in order to remain competitive I don’t see much variation between all of the lenders offering this type of financing. Interest rates are typically about .75% higher than they are for the loan amounts of $417,000 or less. Lenders usually adjust these rates daily also.

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 Super-Conforming Rate? Sometimes we can use what we call a “Piggy-Back” loan where we make a first mortgage for say $625,000 and simultaneously close a Home Equity Line of Credit (HELOC) for the rest – in this example $174,500.