Feb 15, 2008

How the Economic Stimulus Plan Affects Homebuyers

News has spread: recent legislation signed by President Bush will put cash back into taxpayer hands--$600 for most individuals, $1,200 for couples, and an additional $300 for each child.

If you're looking to buy your first house, the extra cash can't hurt. But if you're looking to buy a house that costs more than $417,000, that may not be the best part of the new plan. It also raises nonconforming loan limits from $417,000 to up to $729,750 in high-cost areas. This applies to loans originated through the rest of the year.

What exactly does that mean? Hopefully, if you're borrowing in the range identified, a lower interest rate. Because nonconforming loans can't be resold to Fannie Mae or Freddie Mac, the two largest purchasers on the secondary market, they've generally carried higher interest rates. As Sue McAllister points out in the Silicon Valley Real Estate Blog, borrowers will have to wait and see whether lenders will start dropping rates on these larger loans to conforming loan levels right away, in anticipation that they'll be repurchased on the secondary market.

At this point, too much is unknown--and it may not be time to start cheering. Critics point out that the higher loan limits will be based on local median home prices, and probably won't affect most markets. And while Fannie Mae and Freddie Mac are authorized to buy these loans, they aren't required to.

Also, investors may not be as comfortable with securities backed by these newly eligible loans, because they remain riskier. As Bankrate's Holden Lewis notes, that could mean that mortgage-backed securities segregate regular conforming loans from these new "superconforming" loans. If so, rates on the superconforming loans are still sure to be higher.

If you're looking to buy between now and the end of the year, and you're expecting to borrow more than $417,000 because median home prices where you live are sky high, stay tuned.

Alayna Schroeder