First home or last home, it simply makes more sense to shop for the home, then the loan.
If you have been waiting for interest rates to come down before driving around and checking new homes, get in your car and go. It makes more sense to find the home you want and begin living there.
Why? Most of the time, especially with home prices rising in the Puget Sound area, the equity you will accrue in appreciation will far outdistance the difference you will receive if mortgage interest rates go down. The truth is that home loan rates are lower now than they were a year ago, regardless of how many times you’ve been told “rates are on the rise.”
And, despite what you hear about “needing a tax deduction,” don’t go out and buy a home simply for the mortgage interest rate deduction given you by Uncle Sam. While there is a definite tax advantage to homeownership (especially if you don’t have the time to invest all of your extra dimes), the decision to buy should be domestic, not driven by taxes.
Beginning this weekend, greater amounts of mortgage money will be available at the best “conforming” interest rates possible. Fannie Mae and Freddie Mac, the two biggest players in the secondary mortgage market, are permitted to make an annual adjustment to the maximum size of mortgage loans the two companies may purchase. They now will purchase single-family mortgage loans up to $359,650, effective Jan. 1. The previous limit on single-family mortgage loans was $333,700.
Also effective Jan. 1:
* $460,400 for mortgages on two-family properties or duplexes, up from $427,150.
* $556,500 for mortgages on three-family properties or triplexes, up from $516,300.
* $691,600 for mortgages on four-family properties or fourplexes, up from $641,650.
The limit in designated high-cost areas – Alaska, Guam, Hawaii and the U.S. Virgin Islands – will be 50 percent higher for first mortgages.
The Federal Housing Administration also increased its loan limits for 2005. FHA, part of the U.S. Department of Housing and Urban Development, lifted its ceilings to $312,896 (87 percent of the Freddie Mac limit) in about 40 domestic areas, including Seattle. The FHA floor in 2005, or the maximum loan amount in many rural areas, is $172,632 (48 percent of the Freddie Mac limit).
Two special loans administered through FHA, the Title I and Section 203(k) programs, have become extremely popular. A Title I loan allows you to borrow up to $25,000 for improvements to a single-family home.
These are fixed-rate loans FHA insures against the risk of default. Loans must be made by an approved Title I lender. The 203(k) program is not as well known, but it provides a terrific opportunity for consumers looking to purchase and occupy a fixer-upper property. The program allows homeowners to receive a single, long-term, fixed or adjustable rate loan that covers both the acquisition and rehabilitation of the property. To obtain a loan under the 203(k) program, borrowers must use an FHA-approved lending institution.
Loans for amounts greater than $359,650 are considered jumbo mortgages and typically carry a slightly higher interest rate. The increase in conforming loan limits is based on October-to-October changes in average house prices, as published by the Federal Housing Finance Board, and on supervisory guidance issued by the Office of Federal Housing Enterprise Oversight, the regulator of Fannie and Freddie.
Fannie and Freddie are shareholder-owned corporations chartered by Congress to maintain a steady flow of mortgage funds for the nation’s housing market. They secure and resell a substantial portion of the outstanding home mortgage debt in the United States.
And, yes, the Office of Federal Housing Enterprise Oversight is the same watchdog that has been biting the legs of both companies the past two years. In 2003, a Freddie Mac accounting scandal stunned investors and resulted in a $5 billion earnings restatement, a $125 million fine and the replacement of top executives.
Last week, Fannie Mae announced that chief executive officer Franklin Raines, a graduate of Seattle’s Franklin High School, had taken early retirement and that chief financial officer Timothy Howard had resigned.
Those actions came less than a week after the Securities and Exchange Commission directed the company to make accounting corrections that could erase $9 billion of profit and culminated a four-month flurry of negative events that included a blistering 211-page report alleging that the company used improper accounting techniques, a Justice Department investigation, a civil investigation by the SEC, shareholder lawsuits and a congressional hearing.
What does all this mean for consumers? Rumors are rampant that Fannie and Freddie will drop their quasi-government affiliation in 2005, become completely private and actually make more mortgage money available to home buyers. Such a move would probably eliminate annual ceiling adjustments.
The sky would then be the limit, but who would be in charge of watching the books?
Tom Kelly’s new book “How a Second Home Can Be Your Best Investment” (McGraw-Hill) was written with John Tuccillo, former chief economist for the National Association of Realtors and is available in local bookstores.
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