Buyers of Pricey Homes Get a Break

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Jimmy Garza has been waiting for weeks for President Bush to sign the economic-stimulus package, which should allow him to refinance the $560,000 mortgage on his home in Thousand Oaks, Calif., and get a new, lower-rate loan.
Garza and other homeowners and buyers in such high-cost states as California, New York and Florida will get an extra - but only temporary - break from the federal stimulus package: lower interest rates for so-called

Jimmy Garza has been waiting for weeks for President Bush to sign the economic-stimulus package, which should allow him to refinance the $560,000 mortgage on his home in Thousand Oaks, Calif., and get a new, lower-rate loan.

Garza and other homeowners and buyers in such high-cost states as California, New York and Florida will get an extra - but only temporary - break from the federal stimulus package: lower interest rates for so-called jumbo mortgages.


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That's because the new law raises the 2008 limit for loans that Freddie Mac (Quote: fre) and Fannie Mae (Quote: fnm) can buy or guarantee to $729,500 from $417,000. Loans that are backed by these government-sponsored companies are considered safer investments and therefore have slightly lower interest rates.

In simple dollars and cents: If Garza could refinance into a Freddie or Fannie loan, he might be able to cut his 6.88% interest rate by 1 percentage point, which would save him about $375 a month.

"I want to be at the top of the list" to refinance, says Garza, 39, who owns a construction company.

Under the new law, first-time buyers in some expensive neighborhoods will be able to get loans insured by the Federal Housing Administration for the first time in years - but for this year only.

The FHA, which requires only 3% down payments, historically could insure loans only for up to 95% of the area's median home price, or a maximum of $362,790.

Now, under the new rule, FHA can insure loans for up to 125% of the median home price, which means $729,500 in the costliest communities.

"I tell my sellers that have homes on the market over $417,000 that this will bring more buyers back into the market," says Lisa Gregory, an agent at Prudential California Realty in San Diego.

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If only it were that easy. Doug Duncan, chief economist for the Mortgage Bankers Association, says it will take lenders three to six months to make technical changes so their systems can process the larger loans. And after that, Wall Street investors still must determine the risk of buying these bigger loans.

So interest rates might not come down as much as some hope, Duncan cautioned.

"On balance (the stimulus package) is a plus," he says, "but I would not expect immediate or dramatic change in the near term."

Copyright 2008 USA TODAY, a division of Gannett Co. Inc. All Rights Reserved.

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