Fannie Mae and Freddie Mac
Refinance

'Jumbo' limits set to drop, making larger loans more costly

by Broderick Perkins

If you are shopping for a home in a high-cost area or plan to refinance a large home loan, hurry up and close the deal soon.

In October, large loans, so called "jumbo" mortgages, could cost you an extra 1 percent to 1.5 percent in interest. If you live on the edge financially, that could price you out of the market or force you into a smaller home.

After the housing market crashed, economic stimulus included relief for housing consumers in the form of Congress raising the conforming loan limit in high cost areas.

Borrowers in those high cost areas who put 20 percent down can obtain market-rate financing for Fannie Mae, Freddie Mac or Federal Housing Administration (FHA) underwriting for up to $729,750.

In place since 2008, the special maximum loan amount is a temporary deal due to expire September 30, 2011.

Don't bet on Washington, D.C. coming to the rescue this time. The federal government wants to reduce its mortgage finance risk and, as the Obama Administration moves to phase out Fannie Mae and Freddie Mac, letting the higher conforming loan limit expire is part of the process.

Here's the rub.

A 20 percent down payment on a $900,000 home today could get you a mortgage interest rate of about 4.5 percent on the $720,000 balance, with a monthly payment of about $3,648. Total interest over the life of a 30-year mortgage would cost $593,330, according to the Erate.com mortgage calculator.

After September 30, you'll be faced with financing a jumbo loan at a rate up to 1.5 percent higher. At 6 percent, your mortgage will cost you $4,316 each month -- $668 more. Over the life of your loan, the interest will jump to a whopping $834,000 -- nearly $241,000 more.

Jumbos are more expensive because they are so large and, as such, risky purchases for Fannie or Freddie and must be packaged and resold as mortgage securities in the private sector.

Even at a higher rate, you could find jumbo loans tough to find, once the conforming loan ceiling is lowered in today's risk-adverse market. At the onset of the housing bust, more expensive jumbos were hard to find.

The federal government passing the buck onto consumers and the private sector isn't just a jumbo problem.

In February, the last timeDataQuick Information Systems checked, 33.3 percent of purchase mortgages used in metro areas were FHA-insured, down from 34.2 percent in January and 38.2 percent in February 2010, DataQuick Information Systems reported.

The share was the lowest since FHA loans made up 33 percent of the purchase loan market in November 2008.

DataQuick said tougher underwriting rules is the culprit along with weak job growth, concerns over job security, and the inability of homeowners to sell their homes for enough to pay off their mortgage and buy another house.

At the onset of the housing meltdown, federally-backed FHA loans largely took the place of toxic subprime mortgages.

FHA loans were a small fraction of all mortgages before housing went bust, but peaked at an average 41.1 percent of all home purchase loans in November 2009. During the bust, some high cost regions saw FHA loans soar to 50 percent or more of all purchase loans.

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