Whether or not mortgage rates are quoted in advertisements or in press releases by Freddie Mac and Fannie Mae or in articles written by reporters or mentioned in the nightly news, interest rates are based on many factors, one of which is the loan amount. The best rates for homes in Santa Cruz County will be available for loan amounts over $150,000 and under $417,000. Each year Freddie Mac and Fannie Mae set the maximum loan amounts that they will allow and since these government entities provide the lowest fixed rate mortgages, advertised and announced rate quotes will be based on their parameters.
Every year in late November Fannie Mae and Freddie Mac typically announce the new 'conforming' limits, which is the maximum loan amount that they agree to provide to home buyers for the purchase and refinance of residential properties (1-4 units). Loans larger than the conforming limit are referred to as "jumbo loans" and are funded by other investors whose rates are typically significantly higher. For the most part, the conforming limit has been rising each year and is based on the increase in the October-to-October change in the average price of a home in the United States. The conforming limit remained unchanged at $417,000 for 2006, 2007 and 2008.
In response to an unfolding mortgage crisis and a struggling economy, in early 2008 President George W. Bush signed the 2008 Economic Stimulus Package in which the maximum loan amount that Freddie Mac and Fannie Mae would accept was raised to $729,750. Unfortunately, the result of that stimulus package separated the pricing and approval guidelines for mortgages into two categories: conforming loans and high balance conforming loans. The base conforming limit remained at $417,000 and the expanded limit was increased to $729,750 because the mortgage funds for loan amounts over $417,000 had evaporated by late 2007.
In 2009, the high balance conforming loan limit was decreased to $625,500 and that is where it still is today (at least in high cost areas like Santa Cruz County). Loan amounts up to $417,000 get the best rates and borrowers who borrow more than $417,000 but less than $625,500 will pay about 0.50 percent more in rate. Loan amounts over $625,500 will pay carry even higher rates. Higher fees are charged for mortgages under $150,000. The $417,000 limit is for a single family home. The conforming limit for a duplex is $533,850 and the limits increase for triplexes and fourplexes.
Borrowers who are considering borrowing an amount close to the $417,000 or $625,500 limits may discover that taking more money out of savings (for a larger down payment) in order to lower their loan amount in order to get a lower rate makes good sense. It is also important to note that because points and mortgage rates are interrelated, the more points paid, the lower the rate. Borrowers should do the math with their mortgage professional to determine what rate and point structure makes the most sense for their particular situation.
Local mortgage consultant Peter Boutell has been writing a weekly column for the Sentinel since 1995. Send questions to 'Lending a Hand,' 1535 Seabright Ave., Santa Cruz, CA 95062, fax them to 425-1044 or email them to firstname.lastname@example.org. Archived columns are available at www.peterboutell.com.