Bad Credit Online Magazine - Daily News and Advice on Credit, Debt and Mortgage : New conforming mortgage rates will have an immediate effect

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December 07, 2005

New conforming mortgage rates will have an immediate effect

The very high 2006 conforming mortgage limits are just what the real estate market needs as it should lead to an increase in real estate and mortgage transactions.

The increase for the conforming loans from last year limit is quite bold and dramatic. For a single family home new conforming mortgage is $417,000, up from $359,651 in 2005. That is $57,350 or whopping 16 percent increase. That's the biggest increase since 1979 which was 16.2 percent. Compare it to the following conforming mortgage increases for two previous years:

In 2005, the increase was $25,951, to $359,651 from $333,700 in 2004, just under 8 percent.
In 2004, the increase was $11,000, to $333,700 from $322,700 in 2003, just under 3.5 percent.

Conforming mortgage is the one that conforms to the limits and guidelines set by main secondary agencies, the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC), also known as Fannie Mae and Freddie Mac, respectively. More importantly, both Fannie Mae and Freddie Mac provide liquidity by buying conforming mortgages from the lenders, so the lenders can fund new loans. These conforming mortgages then bundled in different portfolios and sold to investors.

Jumbo mortgages are either held in lenders portfolios or sold to private or institutional investors. The investors have very strict guidelines since they don't want to tolerate much of a risk, so it has been traditionally more difficult to qualify for jumbo loans than for conforming ones. That is why jumbo carries higher interest rate.

By setting those conforming mortgage limits, government will hopefully revitalize recently sluggish real estate and mortgage markets in several ways.

Another important and often overlooked benefit of such high conforming mortgage limit, is that super-jumbo loans are practically thing of the past. Super-jumbo is usually referred to the mortgage amount over $650,000 and would carry even higher rate than regular jumbo, by up to .375%. Now many lenders pushed jumbo mortgage up to rather considerable $1,500,000 amount. Anything above that will carry interest rate hike from .375 to .50%. So unless you are buying something like this, you don't have to worry about super-jumbo mortgage rates. And if you are, well, then you don't worry about interest rates, period.

It will make even greater impact in those regions where home prices haven't increased as high as in California and New York as more homes will fall under conforming limits categories.

It is also important for those who want to buy homes without a down payment as lenders look less favorably on jumbo purchases with no money down.

Refinance market will have a positive bounce as borrowers will try to get conforming rates for their previously jumbo mortgages. How big the refinancing volume will be, is difficult to judge, but it can get quite large because many bought homes on the temporary hikes of the interest rates which have been jumping up and down for the last 12 months.
In addition, many jumbo borrowers who opted for adjustable rate mortgages will certainly look into fixed conforming mortgage products. Needless to say, interest rates going down, would give refinancing market a nice spark.

Large number of borrowers will be refinancing and digging further into home equities, as many stopped at $359,000 because that was the conforming mortgage limit. Now they can take more cash out all the way up to $417,000 giving themselves a nice free debt consolidation loan or a large extra chunk of spendable cash.

Second mortgage limit was raised to $208,500, giving people with enough home equity a significant boost.

FHA loan limits were raised accordingly, with base limit at $200,160 and high cost limit at $362,790 for a single family home, greatly expanding possibilities for the first time buyers, buyers with somewhat bad credit and buyers who have little or no down payment, to obtain excellent interest rates.

 
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Bad Credit Advisor online magazine provides daily news about credit, debt and mortgage. We aren't paid to mention specific deals or products. We cover what we think is interesting as industry professionals ourselves.

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