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The Little Footnote on the 2008 Tax Stimulus Package

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If you weren’t a fan of President Bush and believed he, and politicians in general, only pushed for tax breaks for the rich then you’ll want to pay close attention to a recently Fortune that sheds some light onto the little footnote on the 2008 tax stimulus package. Most people focus on the tax stimulus check they’ll be receiving in a month or two, I know I did because that’s what affects us and most Americans. Fortunately, we have people like Allan Sloan focusing on all parts, including the little piece about raising the “maximum size of a ‘conforming’ mortgage to $729,750 from the previous cap of $417,000.”

What the heck does that mean? A conforming loan is one that Fannie Mae and Freddie Mac can buy. Since they can buy them, the interest rates on the loans are generally lower because they’re less risky. If a bank knows it can sell it to Fannie Mae and Freddie Mac, they can charge less in interest. The spread these days, according to Fortune, is a significant 1.27%.

My friends that share a half-million dollar mortgage, and those who own homes that are worth more than $417,000 but less than $729,750, benefit the most from this. Borrowers have access to lower interest rates and thus are able to purchase “more house.” (Nothing changes for those above the $729,750 amount)

For example, for the monthly mortgage payment of $1,500 can get you a $250,188 loan at 6.00% or a $219,448 loan at 7.27% – that’s a difference in the purchase price of $30,740! And, it obviously gets bigger as your amounts get higher. This makes homes in that range more affordable and thus helps increase their value. That’s stimulus people!

Allan goes on to recognize that the boost will expire at the end of the year, since it was designed to help stimulate the economy, but he suspects it will remain. I just wanted to highlight this piece of the package since very few people discuss it and Allan does a great job. His ending quote is a gem as well – “The one thing I liked about the stimulus package was that the government had enough sense to not send money to people like me. But then it turns around and hands me a housing subsidy. I’ll gratefully accept the gift. But that’s no way to run a country.”

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The 149th Carnival of Personal Finance is now available, I submitted my post on laddering CDs for your emergency fund.

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7 Responses to “The Little Footnote on the 2008 Tax Stimulus Package”

  1. Stngy1 says:

    For those of us living in areas with really expensive housing (our 1000 SqFt home is CURRENTLY valued at $518,000) this “footnote” in the stimulus pkg makes a lot of sense. It reflects the reality of the housing market. It would make more sense, though, if these numbers, as with a lot of things, reflected the varied costs of living in different parts of the US (my husband makes the same salary, in his Govt job, as someone in the same position living in Mississippi. Crazy. AND I don’t think they really would WANT him to move to Miss.; he’s needed here. Crazy).

  2. Jim says:

    Yes I think this change is really aimed at areas where housing costs are very high. Median home price in California is now well over $400k and thats down from the peak it hit over $500k. SO that means half the houses in California sell for $400k or more. This change is not exactly a handout for the ultrarich, since typical middle class income families would stand to benefit from it in many areas.

    Jim

  3. Adfecto says:

    This does work out to be a financial boon to the wealthy (even if it feels middle class in So Cal). It also perpetuates exaggerated home prices. At some point people need to face the pain. Politicians need to stop meddling and let home prices come back in line with incomes. As an example, the average household income in Orange County, CA ranges from $31,212 in Laguna Woods to $203,091 and the overall median income is $75,700 county wide. At the same time the median home price is $650,000. Even the most wealthy community in the county can barely expect to afford the median home (based on the home being 3.25x income). Instead the median home is 8.5x the average income. Clearly, sooner or later, prices must fall.

  4. Todd says:

    Thanks for bringing this aspect to light. It’s interesting, and I don’t see much wrong with it as long as the mortgages are prudently underwritten.

  5. Jay says:

    This whole housing situation is so strange. It shocks me to still watch & listen to folks act as if they’re entitled to “own a home”. Not so, never been so. Particularly before “condos”, many, many people rented their entire lives, particularly in densely populated areas -like SoCal. You really cannot expect purchasable (price, volume) homes to keep in step with the population, nor should it. That’s just the way it is.

  6. ?? says:

    If I am over 18 years old and filed a tax return with the status of single and paid in federal tax. But am a student and my parents claim me on there taxes as a dependent will I receive a stimulus check and if so how much?
    If my parents don’t get the $300 due to being over 17 years old why wouldn’t I receive the $300.00?

  7. Nicholas A.& Ilia SERIO says:

    We received our check in the mail today and it was for $600.00 dollars. Wer were expecting $1200.00. Can you explain the difference?


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