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The Actual Million Dollar Question: Will Rising Mortgage Limits Help You in Retirement?

Image shows a for sale sign in front of a home. The FHFA is expected to raise the conforming loan limits to new heights next year.

The federal government is reportedly set to enter uncharted waters in 2022 when it begins buying mortgages of nearly $1 million.

The Federal Housing Finance Agency will raise the conforming loan limit for single-family home mortgages purchased by Fannie Mae and Freddie Mac to approximately $650,000 in most parts of the country and nearly $1 million in high-cost areas like San Francisco, Seattle and New York, The Wall Street Journal reported.

A financial advisor can help you as your prepare to purchase a home. Find a local advisor today.

Raising the limits on loans that can be purchased by the two federally-backed companies may help homebuyers keep pace with surging real estate prices. According to the Federal Reserve Bank of St. Louis, the median home price in the U.S. increased nearly 20% over the last year, rising to $404,700 in the third quarter of 2021.

In response, the FHFA will raise the conforming loan limit by 18.5%, the largest single-year increase on record and steepest adjustment since the limit was hiked 15.9% in 2006. The increase means homebuyers won’t need to seek a jumbo loan when purchasing certain homes in high-cost areas throughout the country.

What Are Conforming Loan Limits and Why Do They Matter?

Image shows a couple looking at homes for sale online. The FHFA is expected to raise the conforming loan limits to new heights next year.

A conforming loan is a mortgage that adheres to Fannie Mae and Freddie Mac guidelines. These two government-sponsored companies purchase mortgages on the secondary market as bundled mortgage-backed securities. By doing this, Fannie Mae and Freddie Mac allow the original lenders to continue issuing new mortgages.

In 2021, the maximum size of a conforming loan is $548,250 throughout most of the U.S. and $822,375 in high-cost areas. The mortgage ceiling in these high-cost areas is calculated by multiplying the normal limit by 115%.

As a result, a homebuyer will need a jumbo loan to get a mortgage that exceeds these limits. Jumbo loans are typically more difficult to qualify for compared to conforming loans. Those applying for jumbo loans also usually need higher credit scores and lower debt-to-income ratios.

How Rising Mortgage Limits Could Impact Your Retirement

Image shows a senior couple looking up at their dream home. The FHFA is expected to raise the conforming loan limits to new heights next year.

For retirees and people nearing retirement age, downsizing can be an effective way to add to their nest egg while moving into a home more suitable for their current needs. However, not all retirees downsize. Some even look to upsize.

A 2019 Del Webb survey of baby boomers between 50 and 65 years old found that 65% prefer their next home to be either the same size (43%) or larger (22%) than their current home. With higher limits for conforming loans, retirees looking to upsize with a mortgage may be able to drain less of their savings on the home purchase.

Meanwhile, “aging in place” is a phrase often associated with baby boomers. But a National Association of Realtors survey from earlier this year found that baby boomers comprise the second-largest pool of homebuyers behind millennials.

Downsizing in today’s market may also be more challenging than once before. The Wall Street Journal reported last month that the supply of 1,400-square-foot homes is near a five-decade low, meaning more competition for smaller homes. As a result, an older homebuyer who still has a mortgage may sell their home at a premium, but end up with a smaller home and a higher monthly payment. With conforming loan limits set to rise to new heights in 2022, retirees will have more flexibility in the red-hot real estate market.

Bottom Line

The Federal Housing Finance Agency is expected to raise the conforming loan limits by a whopping 18.5% in 2022, according to The Wall Street Journal. As a result, Fannie Mae and Freddie Mac would start backing mortgages of almost $1 million in certain high-cost areas, far above the current $822,375 limit in the priciest markets. The increase would be the largest single-year hike on record. While the potential move is aimed at helping homebuyers keep pace with rising home prices, it may also aid retirees looking to upsize into larger or more expensive homes.

Tips for Getting a Mortgage

SmartAsset has a variety of mortgage-related tools that can help you through the process, including a list of current rates and a mortgage calculator for estimating how much your monthly payments might be.

A real estate agent isn’t the only professional to have in your corner when buying a home. A financial advisor can help you save for a down payment and decide how much home you can afford. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

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