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What Does ESP Mean To You?

By Michael G. MacKenzie, February 19, 2008
Executive Analyst, Community Acceptance Mortgage

H.R. 5140, better known as the economic stimulus package (ESP), became law on February 13th, 2008, just in time for Valentines Day!

Passed by both houses of Congress in record time, H.R. 5140 is hoped to calm the fear of recession that is slowing the stock market and causing consumers to cut back on spending.

The ESP is mostly about rebates for taxpayers and tax incentives for small businesses. However, the housing market will also benefit from the new legislation.

Conforming loan limits will temporarily be increased. At present, the maximum loan that Fannie Mae or Freddie Mac can purchase is $417,000, while the limit for FHA loans is somewhat lower. The ESP will now make it easier to obtain lower interest rates on properties in more expensive markets.

Those areas where housing prices are well above the national average will be particularly affected. The legislation stipulates that the loan limitation "on the maximum original principal obligation of a mortgage that may be purchased...shall be the higher of-

1. The limitation for 2008 (i.e. $417,000) or
2. 125 percent of the median area price for a residence of the applicable size, but in no case to exceed 175 percent of the limitation for 2008.

In other words, the ESP applies to any mortgaged property for which the original principal balance is less than $729,750 (or 175% of the 2008 conforming loan limit.) However, in most parts of the country where median prices are under $250,000, the conforming limit will remain at $417,000.

The impact of H.R. 5140 will depend on the median area prices for each segment of the country.

For example Staten Island, Brooklyn, and New York City are among the most expensive areas in the country, with the median price of a single-family home of approximately $550,000. Therefore, the new loan limits for mortgages will be raised to $729,750.

What used to be a “jumbo” loan can now, in some cases, be considered a conventional loan.

As of mid February 2008, the national average interest rate for a 30-year fixed jumbo loan is about 6.6% while the interest rate for a 30-year fixed conforming loan is about 5.7% for qualified buyers. On a $550,000 mortgage, the savings is about $320 per month, or more than $3,840 a year. That’s $115,200 over the life of the mortgage! On a $729,750 mortgage the savings would be about $425 a month, more than $5,100 a year and more than $153,000 over 30 years!

H.R. 5140 is just a temporary measure. It ends on December 31, 2008. So think of it as a Valentines Day gift that can be acted upon all the way through 2008!

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