Jumbo mortgage higher interest ahead

If you're in the market for a luxury home and expecting to have a mortgage loan over $729,750 then be prepared for a surprise. A loan that large will put you into jumbo mortgage territory and along with that comes higher interest rates.

In case you don't know what a jumbo loan is, basically it is any mortgage loan over $729,750. Why $4729,750 you might ask? It's because this is where Freddie Mac and Frannie Mae have set the cutoff point for conforming loans and it means that they will not buy any loans greater than this amount. That's a big deal in the secondary mortgage market since these two lenders own over 50% of all home mortgages in the United States.

Investors view jumbo loans as higher risk than smaller more common mortgages and price them accordingly. The thing is that most jumbo mortgages are taken by borrowers who typically have a very strong background. They have stable jobs, a high credit score, high incomes, high net worth and money in the bank. These are people that are not very likely to default on their home loans.

No matter that the loans should be considered safe, it is the perception that they are high risk that drives up the interest rates on jumbo mortgages. Because of the high risk perception the sellers of these loans need to do something to compensate investors for the increased risk in buying jumbo mortgages. That "something" comes in the form of higher interest rates for jumbo mortgage loans. As is the case with any investment a higher risk translates to higher return on investment. It's simple Finance 101. Of course the one that suffers is the jumbo loan borrower.

Besides being perceived as high risk loans, the jumbo loans have a limited number of investors interested in them. Mortgage resellers need to do something to sweeten the deal and entice these investors to buy more jumbo loans. The easiest way to do this is through increased yield. This is just one other reason that interest rates are higher for jumbo mortgages.

So, how much will all of this actually influence your jumbo mortgage rates? Usually there is a difference of anywhere from