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Relief Ahead For Troubled Areas of the Housing Market? If This Law Passes, Your $750K Home Could Cost You $500 Less Per Month

Kevin Boer, Broker Owner, 3 Oceans Real Estate, Inc. ()

January 24th, 2008 · 7 Comments

Several changes are afoot that may give some breathing room to the troubled parts of the housing market — which includes much of the country, even some areas here in the Peninsula. The Fed’s surprise 75-basis point rate drop a few days ago may lead to lower mortgage rates, and some of those with soon-to-reset adjustable rate mortgages may also be breathing easier.

The news today is that the House of Representatives has signed off on at least a temporary increase in the conforming loan limit, from its current level of $417,000 (more than enough for much of the country, almost irrelevant here) to $625,000, and perhaps as high as $700,000 in high-cost states. Now if the Senate and W. sign off on it, we could have ourselves a deal!

Currently, conforming loans (those which are guaranteed and resold by Fannie Mae and Freddie Mac) are limited to $417,000 in most states, but are about 50% higher in “high-cost” states like Hawaii and Alaska. By some twisted government logic, California is not included as a “high-cost” state.

What impact would raising the limit from $417,000 to $625,000 have on our local market? As a non-mortgage professional, here’s my take on it… (I’m hoping that a local mortgage expert or two may chime in here.)

First, if you’re buying a $1.5M home and putting $300K down — ie you’re borrowing $1.2M — nothing would change for you. Since you’re borrowing more than the limit, your loan can’t and won’t be resold and guaranteed by Fannie and Freddie, and the risk premium for this has increased dramatically over the last year. A quick check over at bankrate.com shows a full 1.16% price difference between a conforming 30-year mortgage at 5.25% and a jumbo 30-year mortgage at 6.41%. Sorry, you’re stuck in the 6.41% camp.

However, if you’re buying a less expensive home — or putting down a lot more money — this could help dramatically. Say you’re buying a $750,000 home and you’re planning on putting $125,000 down — ie you’re getting a $625,000 loan.

Currently, that’s above the conforming loan limit, so with today’s rates you’d be paying (click click click on my calculator) $3914 per month. If the bill passes, you could get that same $625,000 loan for for 5.25% (click click click) or $3451 per month. That’s a handy pre-tax savings of a tad over $500/month, hardly chump change.

The lesson? If this bill passes, and the numbers work out such that the home you’ve been eying would require a loan between $417,000 and $625,000, here’s what you need to do:

  • Scramble, beg, borrow, steal — do whatever you need to do in order to get enough of a downpayment to bring your loan in under $625,000.
  • Work with your mortgage person to get a big enough second mortgage so that your first comes in under $625,000

Further coverage:

Caveat: I am not a mortgage broker or banker. In particular, I am not your mortgage broker or banker. The above represents my layman’s understanding of the issue. Don’t make any kind of home purchasing decision based solely on the above. Talk to your mortgage professional. ‘Nuff said.

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7 responses so far ↓

  • 1 Brian Brady // Jan 24, 2008 at 9:02 pm

    “Caveat: I am not a mortgage broker or banker.”

    Disclosure noted. Still, you nailed it.

  • 2 Kevin Boer, Broker Owner, 3 Oceans Real Estate, Inc. () // Jan 24, 2008 at 9:25 pm

    Thanks Brian! I have to confess, I’m getting increasingly troubled by what smells like a bailout here. I want to think about it some more, but it seems this move may simply delay the inevitable, and transfer the bill for this mess from shareholders to taxpayers. Shades of “Savings and Loan Crisis?”

  • 3 Brian Brady // Jan 24, 2008 at 10:05 pm

    Well, I’m biased (as I think you are) because I’m in California. I think this is more about the fiscal stimulus package.

    Bernanke went to Congress, hat in hand, last wekk, and said, “I’m almost out of trump cards on the M1 front. Consider a stimulus”. Congress could have:

    a- resurrected the WPA and built a dam or two
    b- upped loan limits and hope that those Californians buy a car with their $500/month.

    …and you know how we love our cars

  • 4 Kevin Boer // Jan 25, 2008 at 8:53 am

    We sure do love our cars, and if I’m not mistaken we’re actually trying to disassemble some of our WPA-era dams!

    Still, this whole thing has the feeling of delaying the inevitable — bad mortgages coming home to roost — and sticking Mr. and Ms. Taxpayer with the bill.

    But, hey, gotta run — wanna check out those latest 2008 models at the local BMW dealership.

  • 5 Chris Iverson, Realtor // Jan 25, 2008 at 10:44 am

    Kevin and Brian -
    Sadly, I share your cynicism. While I’m sure the Senate and W. will jump on the bailout bandwagon, I assume there is a caveat in the bill about buyers needing to have a down payment or something. One of the issues with the current crisis is that borrowers have been able to get loans without putting in any of their own money (skin in the game). That makes it easy to walk away when the going gets tough.

    BTW - The Wall Street Journal reports that the upper limit being proposed is up to $729K, not the $625K that Kevin used in his calculations. That means more money for BMW payments, maybe even a Jag!

  • 6 Chris Iverson, Realtor // Jan 25, 2008 at 10:54 am

    CORRECTION: There are two components, one covering loans to $625K, the other to $750K. Quoting the NY Times:

    In a nod to the mortgage market problems, the plan would allow Fannie Mae and Freddie Mac, the government-sponsored mortgage-finance companies, to buy loans up to $625,500, from the current $417,000 limit. The Federal Housing Administration would be able to insure home loans of up to $725,000, from the current $362,000 ceiling.

    The one-year increases would make it easier to obtain new mortgages or refinance loans in expensive markets.

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