Thursday, February 7, 2008

Why the Economic Stimulus Bill Matters

Why should a home owner or potential buyer care about the proposed Economic Stimulus Bill passed by the House of Representatives? I’ll answer this in a bit. A conforming loan is one that conforms to GSE guidelines. Loans that don’t meet conforming loan standards due to their large size are called jumbo loans. Interest rates on conforming loans are typically at least 1 percentage point or more lower than compared to non-conforming loans such as jumbo loans.

Currently, Fannie Mae and Freddie Mac have set conforming loan limits at $417,000 for a single home loan. In the San Francisco Bay Area (especially areas like Palo Alto, Cupertino, Los Altos, Hillsborough, Saratoga, San Francisco), with median home prices well over $500,000 and $600,000, nearly all home loans would be classified as jumbo, non-conforming loans. This means nearly everyone is paying at least 1 percentage point higher on their mortgages. Can you imagine what a 1 percentage point decrease on your mortgage would do to payments? For every $100,000 borrowed, you typically save around $65 for each percentage point lower your loan rate is. This means if you’re borrowing $600,000, you’re paying nearly $400 more per month.

Back to the Economic Stimulus Bill and why it matters to you besides the rebate check you may see in the mail. In this bill, there is a provision to temporarily increase the conforming loan limit up to 125% of the median home price for an area with a cap of $729,750. If the bill passes, this means you can refinance your loan and get at least 1% off immediately since you would be applying for a conforming loan.

The best thing to do is to start researching mortgage brokers. If the bill passes, this provision is only valid until the end of 2008. Once this bill passes, you can bet there will be a mountain of refinances, and you don’t want to be caught at the back of the line.

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