I just heard that Fannie Mae and Freddie Mac have raised the limit for mortgages they will buy to $240,000. Will this make it easier to get a mortgage? And what if I need a mortgage over that amount?

You are correct that Fannie Mae recently raised the limit on the amount of a loan it can buy to $240,000 from $227,150. This is an advantage to home buyers because if your loan is less than $240,000, your lender can sell your loan to Fannie Mae. You will then usually get a better interest rate than will someone who needs a mortgage that cannot be sold to Fannie Mae. This is because Fannie Mae guarantees the mortgages that it packages and sells to investors on Wall street. Other mortgages might also be sold to investors, but without a guarantee. The Fannie Mae product presents less risk for the investor and that ultimately means lower interest rates for the borrower.

If the loan amount is over $240,000, it falls into the "jumbo" category, which results in a higher interest rate. However, there is a mortgage program called an "80-10-10" that involves taking both a first and second mortgage and can sometimes beat the higher costs of taking out a jumbo loan.

Let’s look at an example using a $300,000 purchase price with a 10 percent down payment and a loan amount of $270,000. If you elected to take a 30-year fixed-rate jumbo mortgage at 7.25 percent, your monthly principal and interest payment would be $1,842. In addition, because you only have a 10 percent down payment, the lender will require you to obtain private mortgage insurance (PMI) which will cost you another $116 per month.

However, if you opted for the 80-10-10 program, you would borrow 80 percent of the purchase price, or $240,000, for the first mortgage, and the remaining $30,000 on the second mortgage. Because the first mortgage now falls within Fannie Mae’s limit, you can borrow this money at a much lower interest rate, say 6.75 percent. Because of the increased risk associated with second mortgages, the rate on that portion of the 80-10-10 program will be higher, say 8.75 percent. In spite of this, the monthly payment of the first and second mortgages will be $1,557 and $236 respectively, for a total of $1,793 per month, or a savings of $49 a month just in interest. Combine this with the fact the lender will not require PMI on the 80-10-10 since the 10 percent down payment and the 10 percent second mortgage combine to reach the required 20 percent. Your savings now increase to $165.00 per month.

If you are interested in 80-10-10 financing, talk to your loan officer. He or she will fill you in on the details and will ship the best rates for you for both the first and second mortgages.

If you have questions about financing a home, fax or e-mail Pamela at 847-281-0077 or pgrunwald@koenig-strey.com.