Why Jumbo Loans Are More Expensive

There are many different reasons why jumbo loans are more expensive than non-jumbo, or traditional loans. However, there are two main reasons why this is so, and there is quite a lot of debate as to what can be done about it. The first reason has to do with the government, and the second reason has to do with the increased risk associated with such loans.

The first reason we will look at that explains why jumbo mortgage loans are more expensive than traditional loans is due to the government subsidizing the latter group of mortgages. Whether you like it or not, the government is most definitely in the mortgage business via the mortgage agency companies Freddie Mac and Fannie Mae and through the FHA. These agency companies buy the mortgages underwritten by banks, allowing the banks to get them off there books and decrease their risk and time needed to find another buyer of such paper. Because of this decreased risk exposure by the banks, they are able to offer lower interest rates on traditional mortgages, thus lowering the cost for middle-class Americans and lower-class Americans…which is the goal of the government in the first place. While this fact has been debated for many years, it’s important to remember that just because someone is getting a better deal that does not mean that you are getting ‘hosed’. Unfortunately, that is not the case with the mortgage industry–the governments backing costs taxpayers money, and it is the more wealthy taxpayers who pay most of the taxes. And, it is also the more wealthy who are looking at taking out jumbo loans. So, in effect jumbo loan borrowers are the ones who 1) pay a higher rate on their loan, and 2) pay the taxes that allow the middle class and poor to get into a home at less of a cost to them.

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