MORTGAGE refinance is an ideal way to reformulate your existing mortgage commitment by taking a new mortgage loan to close your existing mortgage account, and then paying back the new loan in monthly installments.
People take mortgage refinance loans for one or more of several purposes, such as: reduce monthly payments, prolonging or reducing the period of repayment to comply with the borrower's changed circumstances, or simply taking advantage of reduced interest rates in the market. Whatever be the reason for opting for mortgage refinance, it would help if one understands the terms 'conforming' and 'non-conforming' mortgage refinance. This article will attempt to explain these terms.
Mortgage refinance loans
To start with, let's be clear on this: mortgage refinance is technically the same as a mortgage loan. All that applies to a mortgage loan, including interest rates, applies ditto to mortgage refinance loans too. The term 'refinance' is used only to project the fact that the property being used as collateral for the new loan is already mortgaged under a previous loan, and that the new loan will take over the original loan without releasing the property from its mortgaged status.
Now, we come to the difference between 'conforming' and 'non-conforming' mortgage refinance loans. To understand this, we have to first have a backgrounder on GSE guidelines, Fannie Mae, Freddie Mac, and Federal Home Loan Banks.
GSE guidelines
GSE is abbreviation for 'government-sponsored enterprise'. GSE is a cluster of finance companies created by the US Congress to enhance the flow of low-cost credit to the following sectors: agriculture, home mortgage, and education. Of these three sectors, home mortgage forms a majority portion of credit flowing out of GSEs. There are three groups of mortgage refinance GSEs: Fannie Mae, Freddie Mac, and Federal Home Loan Banks.
- Fannie Mae: Fannie Mae is acronym for Federal National Mortgage Association (FNMA). It is a privately-owned company whose shares are pubicly traded in the stock markets. It is authorized to extend home loans. It is independent of any kind of government support. The securities it issues are not guranteed by the government. The secondary mortgage market helps Fannie Mae replenish its funds so it always has money to lend for home purchases.
- Freddie Mac: This is acronym for Federal Home Loan Mortgage Corporation (FHLMC). It too is a privately-owned whose shares are pubicly traded in the stock markets. It is authorized to extend home loans and loan guarantees. It buys mortgages from the secondary market, and sells securities backed by these mortgages, to investors in the open market. That is how it continues to have money to lend mortgage finance.
- Federal Home Loan Banks (FHLBs): There are 12 FHLBs that are owned by more than 8,000 financial institutions all 50 states, possessions, and territories of the United States. The shares of FHLBs are not publicly traded and its owning institutions (members) are able to obtain low-cost funds for home mortgage lending and other purposes such as small businesses, and rural / agricultural development. Members also get an annual dividend depending on the FHLB's performance and their share in its equity.
Conforming and non-conforming loans
From time to time, GSEs issue guidelines for amounts of loan disbursable.
- Loans that conform to GSE guidelines are called conforming loans.
- Loans that don't conform to the GSE guidelines are called non-conforming loans.
- Of the non-conforming loans, loans that become non-conforming because the loan amount exceeds the GSE guideline limits, are called jumbo loans.
Comparison
Each year, GSEs announce criteria to define a conforming loan. The maximum loan amount is decided on the basis of changes in mean home price during each October-October period. Any loan above this amount becomes a jumbo loan. Fannie Mae and Freddie Mac only buy conforming loans, which they repackage for the secondary market. As a result, conforming loans are more in demand than non-conforming loans. Non-conforming loans are typically priced higher by 0.25% to 0.50% than conforming loans.
The following is a year-by-year comparison of conforming loan limits:
|
|
Single Family |
Two Family |
Three Family |
Four Family |
Second Loan |
High-cost area: |
|
2008 |
$ 417,000 |
$ 533,850 |
$ 645,300 |
$ 801,950 |
$ 208,500 |
$ 625,500 |
|
2007 |
$ 417,000 |
$ 533,850 |
$ 645,300 |
$ 801,950 |
$ 208,500 |
$ 625,500 |
|
2006 |
$ 417,000 |
$ 533,850 |
$ 645,300 |
$ 801,950 |
$ 208,500 |
$ 625,500 |
|
2005 |
$ 359,650 |
$ 460,400 |
$ 556,500 |
$ 691,600 |
$ 179,825 |
$ 539,475 |
Conclusion
As the above table shows, the limit of a conforming loan last changed in 2005. Conforming loans are more popular and easier for lenders to sell. Jumbo loans typically come at a slightly interest rate because lenders have to invest more in their marketing. Go for a conforming loan whether it is for an original mortgage or mortgage refinance.
