Federally chartered mortgage giants Fannie Mae and Freddie Mac have raised their conforming loan limits by $11,000, to $333,700.

This is good news for many Americans. Allow me to explain what it means. Lenders sell closed mortgage loans in bulk to Fannie Mae and Freddie Mac so they can be replenished with funds to make new loans. Once purchased, Fannie and Freddie securitize the loans and sell mortgage-backed securities to investors seeking a safe return on their money.

The current maximum loan amount purchased by Fannie and Freddie is $322,700. This is the "conforming" loan amount limit. Basically, this means that anyone looking for a mortgage in excess of $322,700 would be looking for a "jumbo" loan, which carries an interest rate of perhaps a quarter to a half percent higher.

Since this limit has been raised by $11,000, those Americans looking for a loan between $322,700 and $333,700 will be offered a lower rate. According to Franklin Raines, Chief Executive of Fannie Mae, "as many as 95,000 home buyers could save up to $21,900 over the life of a 30-year mortgage."

Let's see if Mr. Raines' calculations make sense.

A home buyer might be able to lock into a conforming 30-year fixed rate mortgage at about 5.75 percent with zero points. If the loan amount exceeds $333,700, the rate could be a quarter to a half percent higher.

Let's calculate the interest savings on a $333,700 loan from six percent down to 5.75 percent.

The principal and interest (P&I) payment at 5.75 percent is equal to $1,947 per month. At six percent, the P&I payment jumps to $2,001 per month. Over thirty years, that's a savings of $19,440.

It appears Mr. Raines is correct. Using a difference of one-half percent, the savings jumps to $38,880.

But most folks don't hold 30-year mortgages for 30 years. Let's talk about the here-and-now. Who is likely to benefit from the higher loan limits today?

Published: December 24, 2003

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