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
Sources:
www.efanniemae.com
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