What type of loan typically has a higher interest rate than conforming loans due to the greater risk to the lender?

A jumbo loan typically has a higher interest rate compared to conforming loans because it exceeds the conforming loan limits set by government-sponsored enterprises like Fannie Mae and Freddie Mac. These limits are put in place to establish a standard for loans that can be easily bought and sold in the secondary market.

Since jumbo loans are not backed by these entities, they are considered to carry a higher risk for lenders. This heightened risk arises from the potential for higher default rates associated with loans of larger amounts, as well as the fact that they are not eligible for government guarantees. To compensate for this increased risk, lenders generally charge higher interest rates for jumbo loans than for conforming loans.

Understanding the risk dynamics associated with different types of loans is crucial for mortgage professionals, particularly when advising clients on their financing options.