NCPA - National Center for Policy Analysis

Special Mortgage Discounts In Some Pricey Markets

June 11, 2001

People looking to buy high-priced homes in expensive markets in Hawaii, Alaska, Guam and the Virgin Islands can take advantage of discounts that will save them many thousands of dollars over the life of the loan.

As housing prices have zoomed upwards in other U.S. states, those with the most expensive markets want the special mortgage discounts too. Such states include California, and possibly New York, New Jersey and Massachusetts.

However, the discounts, which date to the 1970s, are the result of complex rules that govern how much homebuyers can borrow and still qualify for a "conforming" loan -- a low-cost mortgage funded ultimately by Fannie Mae or Freddie Mac, the government-sponsored mortgage companies.

  • Under current law, in most states loans of up to $275,000 can qualify as conforming.
  • Loans exceeding that limit -- also known as "jumbo" loans -- usually carry interest rates between one-quarter and one-half of a percentage point higher.
  • Last week, for a borrower of $300,000, the difference in interest between a jumbo and a conforming loan translated into about $815 in additional payments a year -- or more than $24,000 over the 30-year life of the loan.
  • The conforming loan limit is higher in Hawaii, Alaska, the Virgin Islands and Guam -- up to $412,500 -- giving some wealthy buyers a break that residents of other states and territories do not get.

Congress originally legislated the exception for Hawaii and the others since transportation costs for materials made home prices exceptionally high. But shortages and heavy demand for housing have recently pushed prices up in some of the "lower 48" states.

Getting Fannie Mae and Freddie Mac to change their guidelines would require an act of Congress, but no legislation has been introduced yet.

Source: Patrick Barta, "Hawaii Mortgage Discounts Draw Notice," Wall Street Journal, June 11, 2001.

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