|Higher rates for conforming high balance mortgages
If you are in the market for a mortgage refinance or home purchase, plan to pay more if you are borrowing more than the conforming loan limit.
The national conforming loan limit for the best mortgage rates is $417,000 extending through Dec. 31, 2013. If your loan is up to $417,000 or lower, generally you’ll be in the conforming loan category.
The benchmark loan amount is $417,000 for one-unit properties (such as a single family residence) in every state other than Alaska, Hawaii, Guam and the United States Virgin Islands. Fannie Mae and Freddie Mac bundle and securitize these loans for sale in the secondary market and continue to show large demand for conforming home loans.
Fannie Mae and Freddie Mac also bundle and securitize bigger loans in certain “higher-cost counties” nationwide. These loans often exceed the conforming limit of $417,000 and are referred to as “conforming high balance.”
While these loan amounts exceed $417,000, they’re still considered conforming so long as the amount financed does not exceed the high cost loan limit in a county/state in which the property resides.
Taking a look at Sonoma County, the conforming loan limit is $417,000, however, the higher cost loan limit is up to $520,950, and thus any loans amounts above and beyond the $417,000 to $520,950 are considered to be conforming high balance mortgages.
How mortgage rates compare on conforming vs. conforming high balance mortgages
Following is an average mortgage rate pricing scenario, assuming no discount points.
• Conforming: Loan amount financed, $417,000; interest rate 3.63 percent; and payment (P&I), $1,902.
• Conforming high balance: Loan amount financed, $520,950; interest rate 4.0 percent; and payment (P&I), $2,487.
• Why conforming high balance mortgage loans cost more: When a lender originates a conforming mortgage loan ($417,000 or less), for the most part it is widely held in the secondary market.
These loans have the greatest demand as they perform better. Bond traders and investors are willing to purchase large quantities of Fannie Mae/Freddie Mac mortgage bonds in the conforming mortgage market because of that performance rating.
A bigger loan equals bigger risk.
When a lender originates a conforming high balance mortgage, the pool of secondary market investors that lender has the ability to offload that loan to is smaller, even though the lender “hedged” by charging (a risk based fee built into the rate) a higher rate to the borrower.
Steps for getting best deal on conforming high balance mortgage
1. Find a mortgager lender for the loan limit in your area.
2. Apply for the mortgage loan with a Fannie Mae or Freddie Mac lender.
3. Get qualified with the lender upfront; this means authorizing the pulling of your credit report as well as providing supporting financial documentation.
4. Pay the $450 to order the home appraisal (or whatever your lender charges).
5. Lock the interest rate on bond market rally day (typically happens when the stock market is selling off; your lender should know this).
6. Consider paying discount points or small overhead to get the interest rate under 4 percent or wherever your target interest rate is
7. If you have the cash, pay down the principal balance to the conforming loan limit (doing so saves a tremendous amount of interest over term of loan)
Mortgage tip: whether you are buying a home or refinancing a mortgage the interest rate changes on conforming versus conforming high balance loans remains constant.
The same applies to conventional vs. government mortgages.
Additionally, should your loan balance exceed conforming high balance limit in your area, you’ll be looking for a true jumbo mortgage wherein your best bet is working with a portfolio lender specializing in jumbo mortgages.
Scott Sheldon is a local mortgage lender, with over six years of experience helping people purchase and refinance primary residences, second homes and investment properties. Visit him at www.sonomacountymortgages.com.