First, we have the government issue. The Unites States Federal government is implicitly and very directly involved in the housing market (the largest industry in the USA) via their associating with the FHA and the agency companies Freddie Mac and Fannie Mae. Essentially, and through a few different ways, the government subsidizes the housing and mortgage market for those who are considered ‘middle’ and ‘lower’ class Americans. They do this through the agencies and they do it through the tax write offs that one gets on the first million dollars of a mortgage. However, if your mortgage is for more than $417,000 (as of 2010) then you do not get the first subsidy – the one that comes via the FHA or the agencies.

Second, you have the fact that in reality, even without any subsidies, there are reasons why jumbo loans are more risky for banks in general. This comes from the fact that if a higher valued mortgage defaults it can be harder for the lending institution that owns the mortgage to recoup their costs and sell the home. It is just harder to sell a more expensive home than a cheaper home (of course there is debate as to how much of that is due to the fact that there are less people who can afford the homes and how much is due to the fact that interest rates are higher in the first place).

The bottom line is that there is not just one, simple reason why the rates are lower on traditional mortgages than they are on jumbo loans. But, there are ways to bring your mortgage value down to conforming limits, so it may be worth looking at some of these options if you fall into this category.