Fannie Mae and Freddic Mac announced their annual increase of "conforming" loan limits this week. Effective next year, the most commonly used single-family property loan limits will be increased from $333,700 this year to $359,650 in 2005. This 7.8% increase is much higher than the 3.4% increase in the last adjustment. (See my discussion one year ago.)
As reported by CBS MarketWatch, "[t]he increase is based on the October-to-October changes in average U.S. house prices as published by the Federal Housing Finance Board and on guidance issued by the Office of Federal Housing Enterprise Oversight." The 2005 increase reflected the fact that house price climbed significantly in the last twelve months.
Why is "conforming" relevant? If the amount of your mortgage is larger than the limit Fannie Mae and Freddic Mac posted, you loan will be "non-comforming" and is subject to higher interest rate than "conforming" loans. The interest rate margin is usually a quarter percentage point. On a mortgage of $400,000, it can make a difference of $1,000 in additional interest payment every year. (Why are non-conforming loans more expenses? Try this BankRate article.)
On the other hand, most of us will not feel the benefit of the increase. You will only benefit from this change if your financing amount (home value minus your downpayment) is between $333,700 and $359,650. If you are buying a multi-family property, or live in Alaska, Hawaii, Guam or the U.S. Virgin Islands, your limit is higher. Check out Fannie Mae's press release for details.