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Limit for Conforming Loans Increases Effective January 1, 2006
Effective January 1, 2006, the conforming loan limit will increase from $359,650 to $417,000, a 16 percent increase. Conforming loan limits, the maximum loan amount a borrower can assume without being considered a jumbo loan, are adjusted each year by the Federal Housing Finance Board. The FHFB surveys home purchases for the final five days of each month over a 12 month period and compares the sales prices to the previous period. Refinances and government type loans such as FHA and VA loans are not included in the survey.
The expected result of the increase in the conforming loan limit is that an additional 500,000 families will be able to purchase a home with a conforming loan. Why is this important? In actuality, it isn't all that important. The difference in interest rates between a conforming loan and a jumbo loan is only about 0.25 percent. The savings for a home buyer who borrows the full $417,000 with a 30-year fixed rate loan versus a jumbo loan for the same amount is approximately $24,500 over the life of the loan. $24,500 divided by 360 months equals $817 per year in savings.
The new limit will have little effect in areas where home prices are near the national median home price - approximately $232,000. In areas where the median home prices are much higher; Washington, D.C., Southern California, New York, and Chicago, the difference will be more noticeable as the new limit will give home buyers additional options for loans with low down payments.
To summarize, effective January 1, 2006, the new loan limits for mortgages will be $417,000 for single-family homes, $533,850 for two-family homes, $645,300 for three-family homes and $801,950 for four-family homes.