In response to a general rise in interest rates, the federal government has increased the maximum allowable interest rate on government - backed home loans to 8.5 per cent, effective yesterday.
The move affects mortgages insured by the Federal Housing Administration and those guaranteed by the Veterans' Administration. The maximum rate for both types of loans had previously been 8 per cent.
Although banks have plentiful funds for home mortgages now, many are reluctant to make government - backed loans because the maximum rate is under the conventional loan rate.
In recent weeks, conventional loans in the metropolitan area have been granted at 8.75 to 9 per cent with maximum down apyments.
To keep the yield on FHA and VA loans competitive, sellers have been paying 4.25 to 5 discount points to banks agreeing to such financing (one point is one per cent of the mortgage). Buyers can be charged only one point for the privilege of obtaining a government-backed loan.
Mortgage bankers said the discount points charged to sellers on FHA and VA loans should decline to 2 or 2.5 points because of the interest rate increase.
The FHA insures home loans up to $45,000, while the VA guarantees loans up to $17,000.
John M. Wetmore, chief economist for the Mortgage Bankers Association of America, said the increase was "long overdue" and should have been made three months ago.
He added that it would have little impact on the housing market. "People have jobs and income to buy what they want and housing has a high priority in their spending today," he said.
Michael C. Fox, president of the Northern Virginia Board of Realtors, said the higher rate should bring more VA loan applications in for resale houses. Charles Phillips, president of the Suburban Marylaand Home Builders, agreed that the impact would be felt in the resale market.