Home buyers have been waiting in the wings with an air of anticipation for months now as the 2008 Stimulus Package rounded the corner. There were high hopes that we would see low rates for homes that could cost as much as the $700,000 in some markets. Buyers have been sitting on the sidelines waiting for the new rates to become available so that they could more easily afford the more pricey homes that they are interested in. Some feel that there may have been a slight drop in buyer interest during this waiting period as people hoped to stretch their wings a little bit further than what they have been limited to spending so far. With today's real estate market, no one seems to be in a rush to buy these days. Most people feel that if we just wait a few more months, prices will continue to drop. A recent Countrywide employee was cited as stating that we'll be seeing the largest volume of adjustable rate mortgages complete their terms during the winter of 2008 and 2009. If rates can't drop down low enough to support those buyers we'll see even more foreclosures than the market has already experienced.
So what happened with the new conforming loan? The new deal isn't quite as good as it sounded. An example would be San Diego where the new conforming loan can extend to include properties up to $697,500 for a single-family home. This is certainly much larger than the prior conforming loan limits of $417,000. But there is a big catch. If your loan isn't a normal conforming loan, the lenders will be placing extra fees into the loan package for you. Via a variety of small penalties, you'll likely end up paying nearly 1% higher for a "larger" conforming loan than you would have for a standard conforming loan of under $417,000. So what's the big deal? Currently, a jumbo loan runs roughly 1.2% higher than a standard conforming loan. So when you see these difference you'll realize that we really are talking about three classes of loans now.
* The Traditional Conforming Loan <$417,000
* The New Conforming Loan from HR 5140 which ranges from $417,000 to 125% of the average home price for a community
* The Jumbo Loan for greater than 125% of the average home price for an area
The interest rates seem to run 0.5-1% higher for the New Conforming Loan and 1.2% higher for the Jumbo Loans.
In fact the only reason that the New Conforming Loans strike us as a deal still is that Jumbo Loans have been gradually diverging from conforming loan rates. While the conforming loan rates dropped in recent months, the Jumbo Loan rates have actually increased. This divergence in rates makes the New Conforming Loan seem like a good deal, but in all practicality it only is replacing the prior role of the Jumbo Loans.
What's this mean to the buyer? It's business as usual. If you are looking at purchasing a home then don't let the mortgage sway you. Your rates will be similar as they were in the past. There is some question as to what would happen if you wait until the HR 5140 act expires later this year. If the Jumbo Loan keeps its relatively higher rate compared to the Conforming Loan we may see that the gap will further widen between traditional conforming and jumbo loans truly making it harder to afford the more valuable homes in your area. Currently we have a graduated loan system where rates rise as the price goes up. But when the gap opens up because of the expiration of the New Conforming Loan we may see some real trouble affording homes that require Jumbo Loans. There may be no time like the near future for checking homes for rent. Locking oneself into a property associated with a declining market could cost you more money than the tax savings of purchasing. Instead you may truly save money by renting.
