Why 'jumbo' mortgages are now a better deal than smaller home loans - Boston.com

It’s true but a bit counterintuitive. Banks will give you a better interest rate if you buy a more expensive and presumably bigger home.

The interest rate on a 30-year jumbo loan – anything above $523,250 in the Boston area – stands at 3.71 percent.

That’s a notch below the rate for a “conforming” mortgage – anything below that number – which weighs in at 3.73 percent, noted Greg McBride, senior vice president and chief financial analyst for Bankrate.

The lower rate on jumbo mortgages is a reversal from the typical trend over the years, in which banks have charged higher interest rates for larger loans on the theory that they are inherently riskier, he said.

The two rates “have gradually compressed over a couple of years,” McBride noted. “About 12 months ago, they flipped.”

“It’s a good time to get a jumbo mortgage,” he added.

Jumbo rates spiked during the Great Recession, rising to more than 1.5 percentage points higher than conventional, conforming loans before settling out one percentage point higher around 2011, according to HSH.

Nor is it just size that gave jumbos their reputation as being a little riskier. While smaller, conforming loans are backed by federal mortgage giants Fannie Mae and Freddie Mac, jumbos aren’t.

But things have changed.

First, conforming loans have become relatively more expensive now for banks to offer, forcing them to charge somewhat higher rates, compared to jumbos.

However, an even bigger change has been an important realization by bankers: While jumbo loans may be bigger, the more affluent home buyers who are taking out jumbos are actually better bets overall, with lower default rates.

In fact, these are the very customers banks are now chasing after, scrambling to offer services like wealth management to tap into other assets they might have.

“Jumbo mortgage borrowers have proven to be not only a very good credit risk, but very good business,” McBride said. “Lenders have been competing very actively for that business and that has benefited jumbo borrowers from a pricing standpoint.”

Why 'jumbo' mortgages are now a better deal than smaller home loans - Boston.com