New jumbo loan limits save cash for local homeowners
The federal economic stimulus package is offering relief to Nevada County residents with very large home loans and an adjustable interest rate.
The new conforming loan limit for single-family residences in the county recently was raised to $562,500, up from $417,000.
It brings a large dose of first-aid to homeowners with large, adjustable-rate loans or who have combined a fixed-rate first mortgage with an adjustable-rate second mortgage. And if the higher limits bring securities investors back into the market, it could result in lower interest rates.
The new mortgage limits are derived from median home prices in each county, and will benefit approximately 300 housing markets around the country. And time to take advantage of them is short: The limits will expire Dec. 31, unless Congress makes them permanent.
The large loans, called jumbo loans, typically carry a much higher rate of interest. Roughly half of jumbo mortgages are held in California, so this new package will have a particularly strong and positive impact on our state, helping existing mortgage holders and new buyers.
The loan ceiling also applies to federally insured FHA loans.
Higher limits, bigger savings
With conforming loan limits previously at $417,000, buyers of pricier homes had three options: Bring in a very large down payment; carry a first mortgage at the conforming level and make up the difference with a second mortgage, often at a higher rate; or obtain a jumbo loan and accept a higher interest rate.
Under that regimen, a person buying a $600,000 home and with 20 percent downpayment would have needed a loan of $480,000 at a 30-year fixed rate.
That scenario would push the buyer into one of those three options.
The buyer could come into escrow with more money down to obtain a conforming loan of $417,000. Or, the buyer could get a first mortgage of $417,000 and making up the difference with a second mortgage of $63,000.
Or, the buyer could get a jumbo loan – one surpassing the federally established conforming loan limit. At a higher jumbo interest rate of, say, 6.875 percent, the buyer’s monthly payment would be $3,153.
Liquidity back into the market
Under the new regimen of higher conforming limits, that same $480,000 loan would qualify for 30-year, fixed-rate conforming loan at a lower interest rate. If the same buyer’s conforming loan interest rate were 5.75 percent on $480,000, the mortgage would cost $2,801, a savings of $352.
One of the goals implicit in this stimulus package is that the new conforming loan limits will bring liquidity back into mortgage world. The hope is that since these loans are backed by Fannie Mae and Freddie Mac, investors would be inspired to return to the mortgage-backed securities marketplace, making money more readily available and bringing rates down.
Susan Costello’s business column appears the second and fourth Tuesdays each month in the business section of The Union. She is the owner of Home Sweet Home Loans, dba Empire H.L.C., in Grass Valley. You can reach her by calling 273-8658.
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