JUMBO VS CONFORMING

Have you ever wondered why you pay more for a jumbo loan than a conforming loan amount?  Why is that?

If you go to Costco to buy your cereal you get a deal because you are buying a bigger box.  A 12-pack of Coke will cost less than 12 individual cans from the vending machine—isn’t that the general rule?  The more you buy the less the per unit cost right?  Then WHY, when you buy a house, do you pay more for a mortgage of $500,000 than one for $250,000?!?

 

Here is the full circle. You walk into your lender’s office to secure financing on your new home, the loan officer prepares the file for approval from the underwriter, who essentially compares your profile to secondary market guidelines to make sure the secondary market will buy your loan from them.  The secondary market bundles the loans into 3, 5, 10 million dollar bundles and sells them to a variety of servicers.  The servicers, who make their money off doing just that, servicing your mortgage by sending you bills, tax summaries, paying escrows, etc., doesn’t hold the mortgage, they sell it to Fannie Mae or Freddie Mac, who sell it to Wall Street to be broken down into mortgage-backed securities for a fee. That fee is spread over the massive dollar amounts and passed back through the chain all the way to you as the borrower.  That process takes between 30-60 days (which by no coincidence, is the same time frame your loan would traditionally be locked for prior to close).  Once your loan is on the market as a mortgage-backed security who buys it?  Check your 401K; if you own bonds, you own a piece of your own mortgage.

 

Now, on a Non-conforming (or JUMBO) loan amount, one greater than Fannie Mae or Freddie Mac will accept, it is sold to a smaller group of investors. They follow the same circle, but when they get to the division of these quantities into mortgage-backed securities they pay the same incremental fees as Fannie Mae or Freddie Mac, but now spread over a much smaller pile of money (comparatively).  Those fees are passed up the ladder through all parties and incurred in your mortgage —at a higher rate.  That is the reason you will pay more for a larger (jumbo) loan amount than you will a smaller (conforming) loan amount.