Have Jumbo Mortgage Rates Dropped Enough To Let You Refinance?

For homeowners with jumbo mortgages, the refinance boom has been one long exercise in frustration. Headline after headline trumpeted record-breaking low mortgage rates, but only for those with conforming mortgages owned or serviced by government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.

Well, the good news is that investors are buying jumbo mortgages again, so those of you who are living large have a good shot at saving some real money with a jumbo refinance.

Refinancing Jumbo Loans: An Overview

Jumbo mortgages are those which exceed Fannie Mae and Freddie Mac's loan limits, which range from $417,000 to $729,750, depending on the property location. According to data from HSH Associates, as of late August 2009, 30-year jumbo fixed-rate mortgages were just over 6 percent. Jumbo refinance mortgage rates were much higher than comparable interest rates for conforming loans.

Fortunately, that average jumbo rate has been dropping through the summer and stands at an average rate of 5.26 percent for the week ending August 27, 2010.

You could go even lower if you choose an adjustable-rate mortgage. HSH Associates reports that lenders are offering 5/1 jumbo mortgage rates as low as 4.04 percent, with the initial rate fixed for five years.

Why Jumbo Home Loan Rates Never Tanked

After the recession took hold, investor demand for jumbo loans dried up almost completely. Instead of being able to sell loans on the secondary market, lenders had to keep them on their books (referred to as portfolio lending).

Few mortgage lenders were willing to risk their own funds and tie up their capital by keeping these risky jumbo loans in-house. This effectively killed the market for higher-end homes, increasing foreclosure rates among the well-to-do. Investors withdrew to the safety of government-backed home loans. As the credit crisis wore on, the jumbo-to-conforming spread widened dramatically--to nearly 2 percent in March 2008.

Still Room For Jumbo Rates to Drop

"In just the past couple of months, jumbo loans have really started to be competitively priced," said mortgage expert Keith Gumbinger of HSH Associates in a Wall Street Journal article earlier this summer.

The spread between jumbo and conforming mortgage rates still has room to narrow, however. According to Housing Wire, the spread between jumbo and traditional conforming mortgages was typically around 0.25 percent until August 2007.

Today, the first few offerings of jumbo loan bundles to investors have been well-received, and the spread between jumbo and conforming rates is dropping, although it isn't back to the old norm of 0.25 percent yet. Jumbo loans are considered better risks than they were because, in general, only applicants with substantial down payments or equity and stellar credit are approved for these refinance mortgages.

How to Take Advantage of Jumbo Refinance Mortgage Rates

The revival of the secondary market for jumbo loans should make refinances a lot more affordable for jumbo borrowers. With bigger loan amounts, a small drop in rate translates to large savings: just 1 percentage point lower means big bucks for a jumbo borrower.

For example, if you are paying a rate of 6.26 percent (a typical jumbo rate from 2009) on an $850,000 30-year fixed mortgage, your principal and interest payment is $5,239 a month. At today's average jumbo rate of 5.26 percent, the payment is $4,699, or $540 less per month.

If that isn't enough, try a 5/1 adjustable-rate mortgage at 4.26 percent--another percentage point drop. Your payment on $850,000 drops to $4,186. Saving $1,053 a month adds up to over $63,000 in five years!

If you took out a jumbo mortgage in recent years, the odds are good that you can substantially improve your cash flow today by refinancing. Check out the Should I Refinance? calculator on GuidetoLenders.com to see if you're leaving money on the table by not refinancing.