Rebate for the Rich? Stimulus Plan Has Something For the Wealthy, Too!

P2P-Loans.com came accross this Fortune magazine article and thought our readers might like to know more about the stimulus plan (even if you don't qualify for the rebate check, READ ON). In a previous blog post, we wrote about the tentative stimulus plan (at the time of our posting it was not a done deal) and what it might mean to taxpayers. But, we didn't know about the details (and impact) of the change in the conforming mortgage amounts (discussed in the article below). The bottom line is that if you are an owner of an expensive home, but do not qualify for the tax rebate, this could be a huge money saver for you!

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A gift from the Beltway

High-income folks like me don't qualify for rebate checks. But we're getting so much more.

By Allan Sloan, senior editor at large
(Fortune Magazine) -- I won't be getting an economic-stimulus tax rebate check, but I'm not complaining about it. Not only am I fortunate to make too much money to qualify for a rebate, but I'm getting something far more valuable than the maximum $1,200 my wife and I could have gotten. Thanks to a relatively little-noticed portion of the stimulus package, we'll be able to refinance our house more cheaply than we otherwise could, or presumably sell it for more.

This means that higher-income couples like us who don't qualify for rebates because we have adjusted gross income of more than $174,000 ($87,000 for singles) are arguably getting a better stimulus deal than the 130 million taxpayers to whom Uncle Sam is sending payments.

Let me take you through it. The stimulus package raises the maximum size of a "conforming" mortgage to $729,750 from the previous cap of $417,000. A conforming mortgage is a mortgage that can be sold to Fannie Mae (FNM) or Freddie Mac (FRE, Fortune 500), and it carries a lower interest rate than "jumbo" loans that exceed those limits. Similarly, the maximum mortgage that can be insured by the Federal Housing Administration has also risen to $729,750. For people in high-home-price areas, including mine, these maximum mortgages are now high enough to matter.

Doing the math
Being able to borrow $417,000 on the cheap doesn't help much when you're hoping to sell or refinance your house for, say, $750,000. But a $729,750 limit works out just fine. This higher limit translates into cheaper refinancing or a higher sales price, because the lower interest rate means buyers can presumably afford to pay a higher price.

If we assume a 5% down payment, we're talking about houses in the $450,000 to $765,000 range becoming eligible for these loans. The range rises if people make larger down payments or put second mortgages on top of these loans.

We're talking major money here, folks. In today's market, the interest difference between a conforming loan and a non-conforming loan for a 30-year fixed-rate mortgage is a whopping 1.27% a year, according to Keith Gumbinger, a vice president at HSH Associates, a mortgage research firm. So a $700,000 conforming loan at 6.01% would carry almost $9,000 less annual interest than a nonconforming loan (at 7.28%).

Gumbinger says that's an artificially high difference caused by the current freeze-up in credit markets. "The spread was about 20 basis points [20-hundredths of a percent] before things got ugly in June," he says. So even if normalcy returns - alas, that doesn't seem imminent - having a $700,000 conforming mortgage would cut a borrower's interest costs by $1,400 a year. Call it $1,000 a year after taxes if you itemize. That's worth much more than a one-time $1,200 nontaxable rebate payment.

READ THE REST OF THIS ARTICLE ON FORTUNE.COM...

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