Lower Rates Likely for Jumbo Mortgages

Mortgage borrowers in the Washington area and a few other pricey markets may soon be able to tap into cheaper interest rates if they're taking out loans of up to $729,250.

Rep. Barney Frank (D-Mass.) said yesterday that President-elect Barack Obama's economic stimulus package would include a provision to help borrowers with loans up to that amount secure better rates. The $729,250 loan limit would remain in place for the rest of the year if it stays in the package, which has yet to be officially unveiled by the incoming administration or considered by Congress. The package is expected to reach the Hill by mid-February.

"That will be for one year. That will give us this year to work on what should be going forward," said Frank, who heads the House Financial Services Committee. He said he hopes some version of the higher limits would become permanent.

Such a change would have implications for borrowers in expensive areas, many of whom lost their chance to buy a home or refinance after the mortgage market began unraveling in late 2007.

Back then, rattled investors stopped buying loans they saw as risky and turned instead to loans that met the requirements of mortgage financiers Fannie Mae and Freddie Mac. At the time, the two companies did not buy loans that exceeded $417,000. And rates on loans larger than that, known as jumbos, shot up.

To help lower jumbo rates, the government early last year temporarily raised the limit for loans Fannie Mae and Freddie Mac could buy to $729,750 in 74 counties, including most of the Washington region. The higher ceilings also applied to Federal Housing Administration loans.

But that limit expired on Dec. 31. A lower cap -- $625,500 -- took effect at the start of this year.

If the Obama team has its way, the loan limits will rise again to what they were and people like Brian Lustig, of Rockville, would get a shot at securing a cheaper mortgage.

Lustig made an offer on a house and expects to settle on it this month. He needs to borrow more than $625,500 to finance the house, which jacks up his borrowing costs.

That's because the mortgage market is structured so that the size of the loan is one of the main factors in determining the interest rate. On a 30-year, fixed-rate loan up to $417,000, the average rate this week was 5.11 percent, according to research company HSH Associates.

The next-best rates apply to loans between $417,000 and $625,500, which averaged 5.28 percent this week. Loans larger than that get hit with the highest rates, which averaged 6.82 percent for the week.

To avoid the jumbo rates, Lustig plans to make a 20 percent down payment and take out two loans, one for $625,500 and another for the balance. The second loan comes with a whopping 9 percent interest rate.

"But we may now have a real money-saving opportunity" if the higher loan limits take effect, he said.

If these limits kick in before he settles, Lustig said he'll try to consolidate the two loans. If they take effect afterward, "I will certainly refinance."

The loan limits are based on a formula tied to the median price of homes in each market.

Yesterday, Frank said that formula might be tweaked to allow certain ineligible submarkets to take advantage of the lower rates.

"We're not here mandating mortgage rates," Frank said. "All we can do is to raise the loan limit."