Higher Conforming Loan Limits May Not Help You Lower Your Mortgage Costs

New conforming mortgage loan limits could help home buyers in high-cost areas    by allowing loan amounts up to 125% of the area median home price. For areas    like California, Florida, Hawaii, New York, etc., this means conforming loan limits may    increase up to $729,750. Home buying might have just become more affordable.    However, markets are responding and it has not been favorable. Investors    in conforming loan products know that these loan amounts are riskier than    those formerly defined as "conforming" and are requiring higher rates for    these loans to compensate them for the added risk. In this case, government    has not been able to influence the market as much as it hoped.

Mortgage Defaults Led to Higher Interest Rates on Jumbo Products

Conforming loan limits are supported by Fannie Mae and Freddie  Mac who help lenders provide more affordable home loans to borrowers. Prior  to the current mortgage crisis, the difference in interest rates between a  conforming loan limit, loans at or below $417,000, and a jumbo loan, mortgages  above $417,000, was only about .25% in interest. Using a mortgage calculator  you can see that the mortgage payment on a loan of $417,000 at 6% = $2,500  a month; adding .25% to the interest rate now produces a mortgage payment of  $2,568 per month. However, when homeowners began defaulting on their mortgages  in record numbers, investors became hesitant to buy jumbo loans and the difference  in the interest rate increased to between 1 and 2%. The mortgage calculator  now shows a monthly payment between $2,774 (7%) to $3,060 (8%) pricing many  homeowners out of the housing market.


Larger Mortgage Loan Limits Pushed to Lower Mortgage Interest Rates

With Fannie Mae and Freddie Mac supporting the higher limits  on mortgage loans, home buyers might take advantage of the lower interest rates  offered to conforming loan amounts making housing more affordable. However,  this assumes that the investors will become willing to accept these higher  amounts without additional compensation in the form of higher rates, and there  are some stipulations:

  • Mortgages must be first liens only. 
  • Mortgages must be originated between March 1,    2008 and December 31, 2008. 
  • All loans must be manually underwritten at this    time.  
  • Loan to value ratios and combined loan to value    ratios on first liens are restricted to 90% on FRM (fixed rate mortgages)    and 80% on adjustable rate mortgages (ARM) products for purchases, 75% for    limited cash out refinances on FRM & ARM products. Combined loan to values    have restrictions as well. 
  • Credit and other restrictions also apply.

This raise in conforming loan limits is part of an economic  stimulus package and is designed to run through the rest of the year. If you  are thinking of a home purchase or a refinance of your existing mortgage, this  year might be the best time to do it. Very few economists see interest rates  getting any lower, so now would be a good time to contact  your mortgage lender


Posted By :
Sheryl Landrum is a Loan Officer in San Diego, California and a freelance writer specializing in mortgage issues.

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