Increasing the conforming loan limit – Will it save you money?

We have kept a close watch on the Economic Reform Act (HR 5140) to be signed by President Bush today.

In addition to the tax rebate it provides to some Americans, the Bill contains a provision to temporarily increase the maximum loan amount the Government Sponsored Entities (GSE’s) FNMA (Fannie Mae) and FHLMC (Freddie Mac) may purchase.

For a loan to be eligible for it must:
1) Be originated between July 1, 2007, and December 31, 2008,
2) Be greater than 125 percent of the area median price for a residence, but not to exceed $729,750.
3) Property must be owner occupied,
4) Be fully amortizing. Interest Only and Option Arms are not eligible. Adjustable Rate Mortgages are being considered.

Will it save you money?
It depends largely upon the median home value for your area.  Only about 20 metropolitan areas are affected.

The second factor is the appetite Wall Street will have for theses loans and to what extent they might increase rates to adjust for the larger loan amounts and perceived additional risk. 

Given that in today’s market the spread between a “Conforming” and “Jumbo” loan is approximately 1% in rate, there may be significant benefit to those that can refinance their existing loan balances under this new limit.  The benefit will especially help those in ARM’s, or other hybrid loan products such as Interest Only and Option ARMS.

When will these changes take effect?
We do not have an answer to this. HUD, the GSE’s, and the investors that purchase these loans must develop procedures for underwriting and delivering these loans.

What to do?
Stay tuned to this site.  We will post the areas and new limits as soon as we know them.  Also, since the demand to refinance for eligible properties is presumed to be extremely high given the significant difference between “Conforming” and “Jumbo” rates, it would be prudent to begin the process of refinancing your home started as soon as possible. 

Share on Facebook