Marketplace

Treasury Direct

Question: I am rather new investor, and am interested in buying the T-Bills from Treasury Direct website. I am particularly interested in the short term T-Bills which mature in 4-6 weeks. The question I have is about the bidding process - should I opt for the Competitive Bid or the Non-Competitive bid, and which one should be used for what kind of situation. I plan to start by investing the minimum amount required i.e., 1000 USD. I have too much exposure in Stocks, so I want to park 2/3'rds of my wealth into non-equity instruments like T-Bills, TIPS, CD's, Real-Estate etc. Raveen

Answer: Buying U.S. government securities directly from the Treasury is a terrific deal for individual investors like you. It's easy to set up an account by going to www.treasurydirect.gov. It's simple to buy securities, and you cut out the costs of paying a middleman. However, since it's a bit complicated to sell the securities, Treasury Direct works best for buy-and-hold investors.

There is no shortage of bills and bonds to purchase. The federal government has a voracious appetite for cash. The government sells Treasury bills at auction every week with maturities of 4 weeks, 13 weeks, and 26 weeks. The auction schedule for longer-term notes (3, 5, and 10 year maturities), bonds (30-year maturity), and Treasury inflation-protected securities (5,10, and 20 year maturities) is weekly, monthly, quarterly, or bi-annual, depending on the security.

What you want to do is make a "noncompetitive" bid. The interest rate on the T-bill is determined at auction by all the "competitive" bids made by financial institutions, investment banks, pension funds, hedge funds and the like from around the world. The government established the noncompetitive bid category for individuals and small institutions. The noncompetitive bidders automatically get the rate set by all the competitive bidding activity by the giants. Individual investors who make noncompetitive bids are guaranteed to get the Treasury bill they want in the amount they want.

02/01/08 by Chris Farrell

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Tax rebate?

Question: Should I wait to file my tax return to see whether Congress passes the Bush tax rebates? Is that part of my tax return or something completely separate? Avery

Answer: You should go ahead and file your return. You don't want to get into trouble with Uncle Sam and the Internal Revenue Service. Even if the rebate is eventually attached to your tax filing, all of us will be in the same boat if Washington asks for revisions. But I doubt that will be the case.

To be sure, the centerpiece of the Washington's current economic stimulus package is tax credits. But the details are still being negotiated, especially now that the Senate has weighed in with its own ideas. Despite strong signs of bi-partisan accord, the bill could change in coming weeks. It could also fail to pass. I'd hold off counting on the rebate money until President Bush signs the final economic stimulus bill.

More importantly, I'd like to make a suggestion on what to do with the rebate assuming the check comes in the mail in late spring or early summer. Washington wants to get money into your hands on the theory that you'll go out and buy an I-phone, a flat panel TV, pay for a delayed car repair, and the like. The rebate is designed to fight the gathering forces of recession by boosting consumer spending. Yet I'd rather people use the money---if it comes--to shore up finances. If there is a rebate, put the money toward paying down debt or adding it to emergency savings.

02/04/08 by Chris Farrell

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Selling A Home

Question: My husband and I own a one-bedroom condo in Brookline, Massachusetts which has a pretty strong real estate market, but has dwindled some with the recent downturn. We currently have a 5/1 arm at a 3.75% interest rate and have lived in our home for 2.5 years. We are not yet sure if we will sell in the next couple of years or if we will keep the home, refinance to a fixed-mortgage and then pull out some equity to buy a larger home and rent this one-bedroom out.

With the recent lowering of interest rates do you think we should consider refinancing now even if it increases our current monthly payment, or do you think we should wait until we are closer to selling? Thanks! Adrienne

Answer: For people in circumstances like you, without any immediate pressure to refinance, a big part of the answer comes from your need or desire to take out an "insurance" policy. Of course, I have no idea where interest rates will be in two to three years. I can just as easily make the case that they will be lower or higher or the same (mostly depending on the outlook for inflation).

Instead of an answer, I have a bunch of questions. Probably the most important is: Will you sleep easier at night locking in today's low rates, even if it turns out two years from now that you would have come out ahead financially by standing pat? Is the price of that interest rate insurance policy worth it to you? Or will you be filled with regret? In the past, I've stuck with my 5-year adjustable rate mortgages and I was comfortable with the gamble (and in each case I got lucky). However, considering all the turmoil in the economy and financial markets I might act differently this time if I were in similar circumstances.

Other factors that can influence your decision: How stable are your jobs? And how realistic is it for you to become landlords? When you look at all of your assets and liabilities, where are you comfortable taking risks with your money and where would you like to buy some stability? And, of course, will you be moving in two-to-three years?

I realize it's often annoying to have a good question answered with a string of additional questions. But hopefully they'll lead you and your husband to an answer.

02/05/08 by Chris Farrell

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Have Fun

Question: My husband and I are in our mid 30's, no kids, both have good incomes and we're putting money away towards our retirement through our employers (so pretax) as well as other sources (Roth). My husband has about maxed the amount he can contribute. I have not, but my employer puts in a substantial amount as long as I put in the minimum required. My husband thinks I should try and max mine out as well, but I want us to put some in shorter term investments so we can enjoy some of the money now to travel, etc. We have a decent amount in savings for emergencies. First, as long as both of us are putting away at least 15% of our income, is it fine to stockpile our savings so we can enjoy some of it now? And second, is there something else besides savings/CD that have a better return rate, but that we can access (within a few months to a year like CD). Thanks. Heather

Answer: My standard advice is to max out your retirement savings plans, and you clearly can afford to do it. However, you and your husband are saving a good chunk of your income every year. You're money smart with a good financial safety net. In this case, I'm on your side. Take that trip (or trips). Go out to dinner. Have fun.

Where to put this money? I would take two very different approaches with the money. First, I'd put the bulk of it into a conservative money market mutual fund with brandname national or international financial institution. (These big companies have a reputation to protect, so the odds are good they'll do whatever it takes to preserve the value of the fund, even if it faces financial difficulties).

I would also consider putting a sliver of the money into a broadbased equity index fund or a tax-managed fund. Your annual tax burden on the savings is low with either product. The money should compound over the years. When you do tap into it, you'll pay low capital gains taxes on the gain.

02/06/08 by Chris Farrell

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Selling A Home in a Down Market

Question: My family lives in a 107-year-old house. We have dreams about a slightly newer home with more yard and more practical family space. We've talked about selling for about two years now, but have watched the market get worse and worse, and our home value drop from near $400,000 to maybe $300,000. And our friends fret as their houses sit on the market for months.

We're tired of being stuck in limbo, but I'm completely freaked out by the idea of living with two little boys in a house that needs to be market-ready 24-7 for the months it may take to sell.

Still, we're talking about biting the bullet and placing the house in the market this spring. Should we get a bridge loan and move out of our house before we ready it for the market? If not, what kinds of resources can you recommend as we get ready to sell? And how do you recommend we find out the true market value for our home? Thanks! Maria

Answer: I wouldn't take out a bridge loan, especially in this market. Bridge loans are expensive, and you could end up holding it for far longer than expected. There's always the risk that potential buyers don't bid on your home. Then what?

Now, it can be a pain keeping a home clean and presentable with two young, active children. But that pressure is nothing compared to the pressure of a bridge loan gone awry. It would be far better--and cheaper--to hire a cleaning service for the time your home is on the market. I would also find a realtor who's used to working with couples with young children, and can work with you on scheduling buyer viewings. You can structure visits by potential buyers to your home. No need for it to be ready for "show" all the time.

The value of your home is a moving target, as everyone wonders "Where is the real estate market bottom?" But you can get a good sense by spending time on websites like zillow.com. Real estate agents will also print you a list of prices for comparable home sales in your neighborhood in recent months.

In the next several years, I expect more families in your situation to opt for remodeling over moving. Homeowners are in a much better bargaining position with contractors. Remodeling prices should be much better than even a few years ago with the downturn in the housing market and the economy. With business falling off, contractors should be more willing to negotiate and strike a reasonable deal. I don't know if that works in your situation, but it's an alternative to research.

02/07/08 by Chris Farrell

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A Credit Freeze

Question: I want to protect my identity, and I've heard individuals are now able to put a credit freeze with the credit bureaus. But it appears that it can get very difficult and expensive as I may need to lift this freeze for car loans or even simple things like getting a new cell phone plan. Is getting a credit freeze worth the cost and hassle for the protection or is there a better way? Tatenda

Answer: Before I give you my answer, here's an email I got the other day from John. He's unhappy with my favorable comments about putting on a credit freeze with the major reporting bureaus:

"I followed Chris Farrell's advice to freeze my credit report to avoid identity theft. Worst idea ever!!! I needed to refinance recently but could not get Experian to lift the freeze in a timely manner (Equifax and TransUnion were fine) and the mortgage company required all three credit reports. Could not contact anyone at Experian (which has made a fine art of avoiding any direct contact with a person at their company via phone, mail or e-mail). Lost my great re-finance rate. Cost me $45,000 over the life of the loan. Please caution listeners to think about all the implications of doing this."

So there's a cautionary note about freezing your credit. But I remain a fan of a credit freeze, and in recent months the credit reporting bureaus have made it a bit easier on their customers to create a freeze.

Still, John's email emphasizes that a credit freeze only works if you aren't doing much on the credit side. In other words, if you're satisfied with your cell phone contract, credit cards, mortgage and auto loan, and you don't see any need for new credit for the foreseeable future, then a credit freeze and the $30 total it will cost you seems like a good move to me. (It's $10 for each bureau to initiate a freeze.) When you need a new loan, make sure you act on the early side to lift the freeze. (Again, $10 for each bureau to temporarily lift the freeze.) But if John's experience gives you pause--don't do it.

02/08/08 by Chris Farrell

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UGMA

Question: Years ago, we bought zero-coupon bonds for our son's college fund. They were timed to mature as he went through college, which has worked out great. They were purchased under the Uniform Gifts to Minors and are held in a custodial account. The last one has recently been called early, which is great because our son is graduating this May. I have just stuck it in a Money market account for now. My question is this: after I pay the last semester's tuition, there will be about $15,000 left. Can my husband and I keep it? Are there tax consequences for us or for our son? (More detail: our son will be entering the Navy's officer training program to be a nuclear engineer and will not be in need of the money. We have another son who's 8--would it make any difference if we keep the money or put it in a 529 for son #2?)

Answer: You did really well by your son. But now it's your son's money. You gave up ownership of the money when you put it into a custodial account. I'm sure he'll find some use for it down the road, like a car loan or a down payment on a home later on. For your other son, a 529 is good way to save for college.

02/11/08 by Chris Farrell

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Savings and Health

Question: I just finished graduate school and started my first real, full time job. I want to begin contributing towards retirement. My situation isn't as simple as many people my age, as I'm a 30-year old with several chronic health conditions. I'm currently able to work, but a downturn in any of my conditions could change that ability. I have two main concerns:

1) Contributing to a retirement account and then needing the money due to a reduced income due to my disability and having to pay an early withdrawal penalty.

2) I have no idea how much to contribute for retirement health insurance costs, or such costs if I have to retire prior to 65 (before I qualify for Medicare). I'm currently in such a high risk insurance category that it would be several thousand dollars per month IF any insurance company would insure me.

I'm unable to find any information on the web and doubt many retirement advisors deal with this type of concern. Thank you! Dawn

Answer: A lot depends on the income you're earning, of course. But let's start with retirement savings. Take full advantage of a 401(k), 403(b), or similar retirement savings plan at work if it offers a company match. When you look at the performance of a retirement savings plan at work, much of the gain comes from the company match. (And you can draw on that money after age 59 ½ without penalty if you need to pay for medical expenses before Medicare kicks in at age 65.)

You could use the rest of your savings money to open a Roth-IRA. Roth contributions are paid with after-tax dollars, so there's an upfront tax hit, but any gain from your investments is tax free. Contributions to a Roth can be a maximum of $4,000 a year; $5,000 if you're over 50.

But the real advantage for someone with your circumstances is that the Roth is both a retirement savings plan and a store of emergency savings. In an emergency, you can take out money from your Roth contributions without paying or taxes on it. You leave the investment gain in the portfolio alone.

Here's a hypothetical example: Let's say in 2005 you put $2,000 into a Roth, and in 2008 you need $1,000 to pay medical bills--and there is no other pot of savings. You could take out $1,000 from your Roth and not pay a 10% penalty or taxes to Uncle Sam on the withdrawal. Of course, the main drawback to this strategy is that you will earn less on your Roth savings. But sometimes that's a price worth paying.

Two quick thoughts on the healthcare front. If I were you, I would focus my job search and employment goals on employers who offer a good healthcare plan. In most cases, that means finding a government job, or working for a large national or multinational corporation. I don't how much you'll need to set aside for healthcare when you get older. By then, we could have universal health insurance--or not. My main message is that you have to save more than the average person to build up a financial cushion. And A Roth is one way to accomplish that goal.

02/12/08 by Chris Farrell

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Mother-in-Law Finances

Question: My mother-in-law, who is in her mid-50s, just got a nursing degree and her first job as a medical professional. She has no savings, some minor credit card debt, and has, up until now, always lived paycheck to paycheck. What should be her priorities for getting onto good financial footing so that she doesn't have to work for the rest of her life, and so that my wife and I don't have to be the sole source of support for her once she retires? I've guided her towards establishing an emergency savings fund, paying off her debts, opening a Roth IRA, and starting up with her employer's 401k. Does this sound right? What would you recommend? Thank you! Alex

Answer: You've given you mother-in-law good advice and covered the basics. Here are a couple of additional suggestions, or at least ideas to think about.

Education matters. Assuming that your mother-in-law's health holds up, she'll have to work longer than many of her peers. She should continue to invest in her profession, continually improving her nursing skills, and making herself a valued employee at work.

Her health is critical, too. Luck plays a role when it comes to health, especially as we age. But there is a lot we can do to improve the odds of living long and healthy. I would encourage to "invest" in staying healthy.

I would open up a conversation with her about living arrangements. Will she rent? Does it make more sense for her to buy, perhaps with you and your wife as equity investors in the home? What about an assisted living center or a continuous care community?

Last, keep doing what you're doing. It's important to maintain a low-key and ongoing discussion about finances between you and your wife and her mother. The three of you can figure out what needs to be done, but it's much easier when the money conversations are a non-judgmental part of your relationship and conversation--instead of a subject that comes up in a crisis.

02/13/08 by Chris Farrell

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A Home Equity Line of Credit

Question: Hi - I have a $10,000 home equity line of credit (HELOC), which was essentially a 2nd mortgage when I bought my home 4 years ago. The balance of my HELOC is now $0; I do not plan to make any future HELOC withdrawals as I have a substantial "emergency" cash fund. (My primary mortgage balance is $190,000.)

Is there any reason to keep the HELOC open, such as for tax or credit score reasons? Or, am I better off officially closing the HELOC account? I may sell this home in 1-2 years. Thanks for your guidance. Stephanie

Answer: As far as I am concerned there are two good reasons for keeping a home equity line of credit open. The first is that it acts as an emergency store of funding. The second reason is to pay for renovation projects over time. In your case, neither reason applies. Another factor to check out: Some banks charge "inactivity" fees. You don't want to pay for that.

That said, here's why most people would advise you not to close it: Your credit score. When it comes to credit scores the longer you've been doing business with a lender--and making your payments on time--the more you're rewarded with a high score. It's a numerical calculation that bothers me for two reasons. First, I do worry about keeping unused accounts in an age of identity theft. And secondly, financial common sense says if you're no longer tapping into a product, end the relationship. The only beneficiaries of this credit score formula are lenders who can always hope that by keeping the account open, you'll eventually start using it again.

Here's a way out of the conundrum. If you aren't going to be taking out a new mortgage, a mortgage refinancing, a car loan or some other big ticket borrowing for a couple of years, go ahead and close the account. The dip in your credit score won't matter, and with time by maintaining payments on other debts your credit score will climb back up. However, if there is a major transaction in your future, I'd keep the account open. In your case, I'd leave it alone for now since you may sell your home in a year or two.

02/14/08 by Chris Farrell

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The Tax rebate

Question: I have heard that this new rebate check that was just passed by Congress and now the White House is nothing more than an advance on our 2008 tax return. Is that true? Graham

Answer: I just pulled this comment from Graham. We've got several similar questions.The tax rebate is the same as a 2008 tax cut. But you get the money this year (most likely late Spring/early summer) after filing your 2007 tax return.

How much of a rebate you get--if any--will be based on your 2007 return. For instance, singles with no children and earn over $87,000 in gross income don't get a rebate. The same holds for childless couples with over $174,000 in income.

02/15/08 by Chris Farrell

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President's Day

I hope you enjoy the holiday. I'll resume posting questions and answers tomorrow.

02/18/08 by Chris Farrell

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The Tax Rebate, Again

Question: My parents are receiving social security and do not file income tax. Do they have to file an income tax return for 2007 in order to receive the tax rebate? Thank you. Chan

Answer: The simple answer is, yes. To get that rebate check you need to file a tax return. That includes people who normally don't file, such as retirees like your parents and disabled veterans. The reason is that the rebate amount (as well as the phase-outs) are calculated off 2007 returns.

By the way, in the 2008 tax year the IRS will refigure your rebate based on your 2008 tax return. It's a heads you win, tails you win calculation. You get to keep the money without penalty if it turns out the government gave you a too big a rebate check. But if your rebate check was too small the IRS will send you the difference.

02/19/08 by Chris Farrell

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Saving for a Home

Question: I am 27, married with my fourth kid on the way. I'm currently a full time student and working 30hrs a week at Starbucks, and my wife is a stay at home mom. Within this situation, we do not make a lot of money, but I do receive quite a few scholarships and grants that more than cover school and bills, and we don't have any debt. We'd like to start saving some of this extra cash for our future home, which we plan on buying in about 5-7 years. I have looked at putting the money into CDs, but I want to know if there is a better way of maximizing a return on the money. Thanks for your time, Glen

Answer: I think you and your wife could teach all of us a lesson or two about the art of living well with little money--without taking on debt. In your situation and with your homeownership goal, there's nothing wrong with parking cash in bank certificates of deposit. And as long as the value of the CD is under $100,000 there is no credit risk, either, since they're FDIC insured. I'd would look at the after-tax yield you're earning on the CDs to the aftertax yield you could earn on a comparable Treasury security. I would put my savings into whichever one is paying you a better aftertax yield.

But let me toss out a couple of other options for you to consider.

First, in this period of uncertainty, when the Fed is combating recession while crossing its fingers when it comes to inflation, putting money into a brand-name, conservatively run money market mutual fund can pay. The reason for putting money in "cash" is if inflation stirs and interest rates go up, the money market fund will start paying you those higher interest rates quickly.

Another option is a short-term bond index fund. Fees are low with bond index funds, and the portfolio itself is well diversified. You should earn a slightly higher yield in a fund like this, but at the cost of increased volatility.

My last idea is to consider adding a thin stock market layer to your savings, say, through a broad-based equity index fund. My thought is that quality stocks are getting progressively cheaper (they'll probably head even lower in the months ahead). Your time horizon is long enough to justify taking on some extra risk to meet a specific goal. If everything works out, the finances of home buying will be that much easier. But if the market is down when you're putting together a down payment--and it doesn't make sense to sell stocks--the stock market portion of your portfolio won't be big enough to prevent you from becoming a first time homebuyer.

02/20/08 by Chris Farrell

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Living and Investing Abroad

Question: I'm an American living in Germany married to a German. I do not work, except for small English teaching jobs. My husband works in the German tax field with some international tax aspects. He does not have the time or the interest to invest any money except in a normal German savings account which does not give a good interest rate. I am 38 years old, my husband is 44, and we have 5 children. We are working to get out of a tremendous amount of debt, but I would like to really get serious about putting aside a nest egg. What can I do as an expat who doesn't have a lot of money but would like to begin to get in on the many savings plans in the States that don't seem to be available here in Germany? I am also concerned a bit about the exchange rate.

Answer: It's a good time for you to be investing, considering how strong the Euro is against the dollar right now. Investing in Europe, the U.S., or anywhere in the world is remarkably easy in today's Internet-linked economy. You can work with full service brokers, discount brokers, online firms, plus all the banks and major mutual fund companies will open up an account for you--no matter where you live.

In your case, I think the bigger issue is figuring out how to invest. I have two books to suggest. The first is "The Random Walk Guide to Investing: Ten Rules for Financial Success" by Burton Malkiel. It's a very simple, straight forward book covering the main personal finance topics. I recommend this book a lot to people who want to quick read and introduction to the topic.

The other is a bit dated, but it covers a lot of ground: "The Wall Street Journal Book of International Investing: Everything You Need to Know About Investing in Foreign Markets" by John A. Prestbo and Douglas R. Sease.

02/21/08 by Chris Farrell

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Investing for Son

Question: I am thinking of investing my sons' money (from gifts over the years) in index funds. My sons are 12 and 14 years old. Is this a good idea and would you recommend some low fee/no fee index funds? Thank you, Phyllis

Answer: It's an excellent idea for long-term savings. (However, if you want them to learn how to invest, it's usually better to open up a discount or online brokerage account for them and let them research and invest in individual stocks.) A number of the major mutual fund companies offer low fee broad-based equity index funds, such as Vanguard and Fidelity. To give you a benchmark, you're paying too much if the expense ratio is more than 0.25% for a Standard & Poor's 500 equity index fund.

02/22/08 by Chris Farrell

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Yes, File 2007 Taxes

Question: My 27-year-old daughter is developmentally disabled, lives at home and works for a sheltered workshop. Her last years' earnings were $1646, no federal or state taxes withheld, just social security and medicare. She also receives around $1000 in SSI per month. 1) Does she need to file taxes? 2) Is she eligible for the up to $600 "rebate"? Thanks for your time. Sincerely, Tina

Answer: Yes, everyone must file 2007 taxes to get a rebate.

02/25/08 by Chris Farrell

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Another Credit Reporting Bureau

Question: While I was checking my credit reports, I came across the name of a fourth credit reporting agency, Innovis. I was told they are not included in the "one free credit report a year". My understanding is that Fannie Mae and Freddie Mac are required by the government to report to them. Is this true? Who are they and why aren't they required to furnish a free report like the other agencies? Should I be concerned about checking this report as well? Judi

A: You're right--Ugh. There is another credit reporting bureau and, yes, Freddie Mac and Fannie Mae require that mortgage servicers report payment histories to Innovis. The federal government does the same. If you go to the Innovis website at www.innovis.com you can learn how to order a credit report, put on a fraud or security alert, freeze your credit report, and so forth. Problem is, few people realize it even exists.

Its basic business model is different from the Big Three credit bureaus. As I understand it, its main business is helping creditors put together mailing lists--the solicitations you get in the mail. If there's a black mark on your credit record with Innovis--whether it should be there or not--you won't get credit offers in the mail. Personally speaking, being free of mail solicitations isn't a bad thing. On the other hand, it's bad if you're denied a chance at a deal because of a mistake on a credit report that few people realize exists. And you don't want credit mistakes to linger anywhere.

I don't understand why Innovis isn't part of the yearly one-free-credit-report requirement. It's an oversight that should be corrected.

02/26/08 by Chris Farrell

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Co-signing and Insurance

Question: I'm divorced with 2 children who have college loans on which I cosigned. I want to make sure that if anything happens (god forbid) that I don't end up paying for those loans. They total about $50,000. Should I buy term life insurance for them? I know this sounds cruel, but I'm about to retire from the teaching profession on a limited income. Christine

Answer: I answered a similar question a couple of weeks ago on the air. I do think having your children buy cheap term life insurance to cover the student loan debt in case of tragedy makes financial sense. It isn't cruel, either. It's just practical.

02/27/08 by Chris Farrell

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Saving for Retirement

Question: I'm a 30 year old who works at a public university. I think I'm eligible to deposit $15,500 at my 403b and another $15,500 at 457b. I plan to deposit $31,000 every year for 30 years and start to withdraw when I get 60. My job is very stable. Our current tax rate is about 28%. Should I do that? Thanks, Qin

Answer: Yes, you can do that. It isn't well known, but through a quirk in the law anyone with a 401(k) or a 403(b) can double the amount they put into their retirement savings if their employer also offers a 457 (which is just another retirement plan). I applaud your discipline and aggressiveness when it comes to savings.

Because you want to retire at 60, I'd like to toss out an alternative idea: Put some of your planned savings into a taxable account. Don't put it all into a pension plan. The reason is that then you'll have a pool of long-term money that you can tap until you're 59 1/2 without paying the 10% penalty imposed by the government on early withdrawals from a pension.

You'll still want to keep your annual tax burden low, say, by investing the money in tax-managed account, broad-based equity index funds, inflation protected savings bonds (the I-bond), and the like. Good savers should always consider a balance of tax-sheltered and taxable accounts.

02/28/08 by Chris Farrell

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The Hike in Mortgage Loan Limits

Question: I understand that the stimulus package includes a provision to raise the cap on conforming loans (i.e. when loans become jumbo). When can we expect to get loans at the new rate? Thank you.

Answer: You're right about the provision. The Department of Housing and Urban Development still has to determine the final loan limits by region. The new temporary limits will go into effect in early March and the idea is for them to last until the end of the year. The limits involve mortgages backed by giant mortgage securities firms such as Fannie Mae and Freddie Mac.

The problem was that the credit crunch and housing market debacle made lenders wary of writing jumbo mortgages. The conforming mortgage limit for Fannie Mae and Freddie Mac was a ceiling of $417,000. Any mortgage above that was considered a jumbo. The interest rate gap between a conforming mortgage and a jumbo is normally 0.25%, but thanks to the housing market nightmare it had widened to about 1.0%.

The new legislation changes the conforming loan limit to 125% of an area's median home price, with a new upper limit of $729,750. Clearly, the new limit was picked with San Francisco, Los Angeles, New York, Washington D.C., Miami, and other high-priced coastal cities in mind. The idea for the temporary hike in conforming loan limits is to make it easier for owners of expensive homes to refinance and for would-be buyers to get a better interest rate.

However, the impact of the change has been muted so far. A conventional 30-year fixed rate mortgage is currently 6.05% while a comparable jumbo mortgage is 6.94%. I'm skeptical the shift in loan limits will make much of a difference in the housing market over the next several months.

02/29/08 by Chris Farrell

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