Loan Modification

Why you want an FHA refinance now

By Peter G. Miller

With the FHA raising annual mortgage insurance premiums after April 18th, borrowers with an interest in financing or refinancing with an FHA loan need to consider the benefits of acting quickly.

At first it may seem as though a mere .25 percent increase in the annual mortgage insurance premium (MIP) is not a big deal. It is. According to FHA Commission David H. Stevens, “the annual MIP increase would generate an additional $2.5 — $3 billion annually.”

You can do your part to give the government an additional few billion dollars, or you can keep the money in your pocket. How? Get a new FHA mortgage or refinance, now, before the rates change. It’s the same mortgage, it just costs less if you act quickly.

You will save real money by acting now. “The monthly payment for an average loan in the FHA portfolio will increase by approximately $30 due to the increase in the annual MIP,” says Stevens.

Well, $30 times 12 months equals $360 per year that you won’t have. If the loan is outstanding eight years you will be out an additional $2,880. That’s money which could have been used for other things.

“We must balance this premium adjustment with the need to support the overall housing recovery,” says Stevens. “This quarter point increase in the annual MIP is a responsible step towards meeting the two percent threshold, while allowing
FHA to remain the most cost effective mortgage insurance option for borrowers with lower incomes and lower down payments.”

But surely the FHA would be even more cost effective if it did not raise premiums.

After all, Mr. Stevens says the FHA loan program is “projected to generate approximately $9.8 billion in receipts for the U.S. Treasury in FY 2011.”

That’s right. The FHA is doing great. How many companies can you name that are generating profits of nearly $10 billion a year. Mind you, this is $10 billion after claims against the program.

Also doing great are investors who buy-mortgage backed securities. Raising the annual MIP means borrowers will have less incentive to refinance so loans will remain outstanding longer — and such stability produces ongoing rates-of-return that investors like.

Lenders in the private-sector will also love the FHA increase. It means there is less competition and loan costs can increase by .25 percent — after all, where else can borrowers go? The FHA program is also, conveniently, more expensive.

There is much to like about the FHA program and the folks at HUD have generally done a good job managing the program. But the .25 percent premium increase is a mistake, one that will cost borrowers big money relative to their income; an increase which is literally unnecessary; and an increase which will delight private lenders.

As to borrowers, after April 18th you’ll pay more for the very same loan because the government says so.

Full post as published by FHA Mortgage Guide on February 23, 2011 (boomark / email).