Increase In Conforming Loan Limits Will Lower Interest Rates For Jumbo Mortgages

February 13, 2008 -

The new law President Bush signed providing $170 Billion of economic stimulus also includes an increase in conforming loan limits. The bill increases the limit on mortgages that the Federal Housing Authority (FHA), Fannie Mae and Freddie Mac can purchase from $417,000 to up to $729,750 for a period of one year.

After a loan is originated it is sold on the secondary market. Government entities can only buy loans that are below the conforming limit. Since this creates more demand below the conforming limit the interest rate charged is lower. Above the conforming limit less investors bid for the loans so a higher mortgage interest rate is charged. As mortgage defaults have increased investors have been reluctant to purchase jumbo mortgages driving up interest rates on large loans.

Normally the difference between conforming and jumbo loans has been ¼ percentage point. However, because of the increasing number of loan defaults and lender bankruptcies in the subprime crises, now the difference is over one percent. Thus under the new guidelines many homeowners with a mortgage from $417,000 up to $729,000 may see up to a full percentage point decrease in their mortgage interest rate. This can result in a savings of hundreds of dollars every month on their mortgage payments. Many homeowners will refinance their mortgage to capture the lower interest rates.

The exact amount of the conforming loan increase will be different for each county. Within 30 days the Department of Housing and Urban Development (HUD) will publish a new conforming loan amount that is 125% of the local median home price with an upward limit of $729,750. The local conforming loan amount should be available in March at www.hud.gov. The increase in conforming loan amount is temporary and will expire December 31, 2008.