Monday, December 12, 2005
Depending upon the sort of home you want to buy and where, the new 2006 conventional loan limits might have absolutely no effect on your plans or finances. Or they just might make it possible for you to buy a house -- whether it's a West Coast starter home or a mid-Western move-up mansion -- without having to pay for a high-interest jumbo mortgage.
This year's giant hike in the conventional loan limit to $417,000-up $57,350 or 15.9 percent-is the largest single increase in the ceiling since the Office of Federal Housing Enterprise Oversight (OFHEO), the federal agency that keeps track of home prices, established an annual limit in 1980. Sometimes referred to as a conforming loan, a conventional loan is the sort that most of us get when we buy a house. It also is the type of loan that most lenders link to their “best” interest rate. A lender advertising a 6 percent interest rate, for example, is normally referring to a standard 30-year, fixed-rate mortgage. Prior to 1980, Congress set conventional loan limits-the highest amount of mortgage money you could borrow without having to get a more expensive “jumbo loan,” explains Frank Nothaft, vice president and chief economist for Freddie Mac. Both Freddie Mac and Fannie Mae, the two biggest mortgage buyers in America, set their conventional loan limit every year. Fannie Mae buys roughly one out of every four conventional mortgages loans issued in the United States today, and the slightly smaller Freddie Mac purchases one out of every six. Combined, the two government-sponsored enterprises buy about 41 percent of all the conventional mortgages issued in the country.
The 2005 conventional loan limit on a single-family home was $359,650, and anyone borrowing more than that would have to pay an extra quarter point or more in interest for a jumbo loan. Next year, however, home buyers can borrow up to $417,000 without triggering the higher rates charged for jumbo loan amounts.
While the new limits are important to the mortgage industry, the only buyers who really benefit are those shopping at the upper end of the limits spectrum. Fannie Mae and Freddie Mac estimate that this will help roughly 500,000 families in high-priced areas and hot real estate markets such as New York City, Los Angeles, Chicago and Seattle. In some areas, a $417,000 mortgage, coupled with a good down payment, can get you a “starter house” or “fixer upper” without a jumbo mortgage rate.
“The 2006 limit is based on the average price of homes across the nation,” Nothaft adds, “and is consistent with house price appreciation." According to a study by the National Association of Realtors, the median price for an existing home rose 16 percent from October 2004 to October 2005. So the loan limit increase reflects that rise in the both the median, or middle, and the average price of houses nationwide. “So, just as house prices grow year after year, so do the loan limits. We've had five years of very strong house prices,” and the annual price increases show that. “It certainly helps make mortgages and home ownership that much more affordable,” he adds.
The 15.9-percent increase applies to multi-family units, too. The new limit for a duplex is $533,850. It's $645,300 for a triplex and $801,950 for a four-plex. The new limit also affects second mortgages, putting the new limit at $208,500. The limits are 50 percent higher in Alaska, Hawaii, the Virgin Islands and Guam, which are designated “high cost areas.” This means that if your credit and income are good enough, you can get a $1.2 million mortgage for a four-plex in Hawaii, for instance, and have it treated as a “conventional” loan.
Nothaft says that the difference between a conventional and jumbo loan can be half a percent in a 30-year conventional loan, or even more depending upon your credit, the size of your down payment, and the type of loan you get. At $417,000, even a half percentage point can make a major difference. At 6 percent, the basic monthly payment-interest and principal, but excluding any taxes, insurance or assessments-on a $417,000 loan would be $2,500.13. Raise it a half a percentage point and the payment jumps $135.59 a month to $2,635.72, or an extra $1,627.08 a year. If your credit is less than perfect or if you don't have a big enough down payment, you could wind up with a non-conforming loan and have to pay more in interest because these types of loans are considered riskier. Typically, the riskier the loan is for the lender, the more expensive it is for the borrower.
It is important to remember that the limits apply to the size of the mortgage loan and not to the price of the house itself. A person could borrow $425,000 to buy a $600,000 house and wind up with a jumbo loan, while someone with more money to put down could borrow $417,000 to buy a $750,000 home and get a mortgage for the conventional rate.
This coming year's 15.9-percent rise is more than double last year's 7.7 percent increase and more than quadruple the 3.4-percent jump in 2004. The 2006-year rise of $57,350 in the conforming loan limit also is the biggest year-over-year dollar increase ever.
Despite how impressive the 2006 loan limit figures look, they won't make any difference to most home buyers. Fannie Mae, for example, says that the average loan for a single-family home in the first nine months of 2005 was $172,000, less than half the 2005 conventional loan limit. However, if you are hunting for a mansion in South Dakota or are just shopping for a handyman's special in Los Angeles, the new higher limits could make a big difference to your financial future.
)
