Jumbo mortgage rate's fall explained by simple economics

Something very unusual happened with mortgage interest rates this week. The interest rate on jumbo mortgages actually fell below the interest rate of the conventional 30-year fixed-rate loan.

Mortgage experts were quick to point out that this latest quirk of the housing recovery had never happened before.

Conventional mortgages are 15-year and 30-year fixed rate mortgages up to $417,000. According to the latest Freddie Mac Primary Mortgage Market Survey (PMMS), interest rates on the 30-year fixed rate mortgage averaged 4.57 percent. Typically, borrowers pay .07 percent in fees if they have at least 20 percent in cash to put down on their purchase.

Jumbo loans are those from $417,001 to around $750,000 (some banks only price jumbo loans to $650,000 and others go higher). Traditionally, borrowers who needed a home loan bigger than a conventional mortgage would pay more for it, sometimes a half percentage or more.

So if a conventional 30-year fixed-rate mortgage carried a 4.57 percent interest rate, you could easily expect to pay over 5 percent for a larger jumbo mortgage. (Loans in excess of $1 million are typically priced on an individual basis.)

But not now. Mortgage experts say that jumbo loans are now carrying a lower interest rate than conventional, which seems to be unprecedented. No one can remember this happening before. But the real question is why?

One theory is the ever so slowly but surely improving economy, which is pushing all interest rates higher.

"Mortgage rates edged up this week on signs of a stronger economic recovery. Real GDP was revised upwards to 2.5 percent growth in the second quarter of this year. In addition, residential construction spending rose for a ninth consecutive month in July. Lastly, the manufacturing industry expanded at the fastest pace in August since June 2011," noted Frank Nothaft, vice president and chief economist at Freddie Mac.

While interest rates have jumped significantly from the lows, they are still at historic lows. The positive economic news means more home buyers are willing to stretch to buy bigger properties to leverage current interest rates.

Twenty years ago, higher interest rates (more than 6 percent) and lower wages meant relatively few people could afford a $650,000 loan on an $800,000 house. Today, a couple earning between $160,000 and $200,000 in annual income, with good credit and a solid down payment, would likely be approved for the loan.

With higher demand for jumbo loans, more lenders have jumped back into the mix. The competition from lenders is certainly having an impact; jumbo borrowers are seeing more offerings with reduced fees. The price disparity is even greater with adjustable rate mortgages, those fixed for five to seven years before converting into a one-year ARM.

Does the flip-flopping of interest rate norms herald a new era for housing? Or are we just seeing too many borrowers spend more than they should to buy property. It's hard to say. There's an economic theory says that the more you buy of something, the greater the discount you should receive. Here's how that works: If you buy two pairs of shoes, the retailer might offer you a 25 percent discount. But if you buy three pairs, you'll get 33 percent off on your entire purchase.

If you apply that to mortgages, it makes sense that a mortgage for $750,000 would be cheaper than one for $417,000 or less.

Except that no one can ever remember it happening before.

Ilyce R. Glink’s latest book is "Buy, Close, Move In!" If you have questions, you can call her radio show toll-free (800-972-8255) any Sunday, from 11a-1p EST. Contact Ilyce through her website, www.thinkglink.com.