Hi Raj, here's why you are seeing a pricing disparity between loans up to 417K and above:
First, right now, there are functionally only two conforming "conventional" loan amounts:
1) â€œClassicâ€ Conforming Conventional to $417K
2) High Balance/Jumbo Conforming Conventional to a max of $729,750 (subject to state/county)
You can check these different levels here (enter state/county):
Even though the government has redefined "conforming" (a few times now), that's not to say the higher â€œconformingâ€ level has been welcomed with open arms by lenders, primarily because Mortgage Backed Securities investors are not particularly fond of them (if investors are not fond of them, lenders are not either). There are a number of reasons why the interest rate spread between the "classical conforming" and "jumbo conforming" rates will continue:
1) The government is only guaranteeing the base 417K conforming loan limit, so investors of mortgage-backed securities (MBS) are focusing their dollars there (by the way, itâ€™s a myth that the government did this before). As a shell-shocked" investor worried about financial stability you are going to stick with a guaranteed investment - especially with the economy in its current state and unemployment on the rise (simply put, unemployed people stop making mortgage payments).
2) The FED is now the primary purchaser of classic conforming MBS, specifically 4.0% & 4.5% MBS Coupon bonds, which typically encompass 4.25-5.125% mortgages. This helps to keep the interest rates artificially low for classic conforming loans.
3) With weak demand by investors for "non-guaranteed" Jumbo MBS, their interest rates are higher; however, itâ€™s for a reason NOT primarily tied to risk! Jumbo loans are priced primarily on the cost of securitization being spread over a smaller number of jumbo loans as compared to conforming loans. This increases the securitization cost per jumbo loan, and this elevated cost gets interjected into jumbo pricing on lender rate sheets to cover this cost.
Case in point: which loan is more risky?
1) $200,000 loan, 20% down, self-employed seasonal contractor, 620 credit score, or
2) $725,000 loan, 20% down, 15-year salaried Google Engineer, 805 credit score.
Isnâ€™t the classic conforming loan more risky?
For these three reasons (FED guarantee on classic conforming, FEDâ€™s purchasing focus, securitization cost spread for jumbos) classic conforming loans have lower interest rates.
Will "conforming jumbo" pricing improve significantly in 2009? They should. As covered here:
Fannie Mae and Freddie Mac recently issued loan underwriting criteria indicating that they would start buying loans of up to $729,750 from lenders starting May 4th. Remember, the key to lower rates for jumbos is securitization cost. So, this move should lower jumbo rates; however, it will have to be seen to what degree this in fact will narrow the interest rate gap between the conforming and jumbo-sized loans. Historically, and until July 2007, the spread or difference between conforming mortgage rates and jumbo rates moved within a narrow range of about 0.20%. As of 5/22/09, this was at 1.31%. This will be the "index" to watch to see if the new purchasing has a positive effect. Stay tuned...
To understand the market mechanics that determine mortgage rates see:
(Note that all the current government interaction definitely is influencing these mechanics)
Please see the following paper on how to properly "rate shop", and be aware that "best price" very rarely gets you best advice.
Also, I do not know your personal situation; however, consider the message contained in this paper:
Some of its points may influence you refinancing decisions.