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Mortgage Q&A: Cutoff date a deterrent to refinance

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Last week, I reported that the Federal Housing Administration is changing the fee structure for its "streamline" refinance program. Effective June 12, the FHA is lowering its monthly mortgage insurance premium (MIP) from .096 percent to .046 percent. This means that, after June 12, the monthly MIP payment on a $200,000 loan will drop from $192 to $92.

More good news is that the up-front mortgage insurance premium (UFMIP), the other part of the FHA fee structure, virtually goes away. On a streamline refinance, the UFMIP is currently 1 percent of the loan amount.

While a streamline refi allows this amount to be added to the loan amount, the borrower should consider carefully whether refinancing to the new rate justifies adding 1 percent of the loan amount to his indebtedness. He may not feel it in the savings account, but refinancing a $200,000 loan to a $202,000 loan to pay for the UFMIP must be considered.

But as of June 12, the UFMIP drops to .01 percent. On a $200,000 loan, the fee drops from $2,000 to $20. This is great news and should open up refi opportunities for thousands, if not millions, of FHA loan holders.

I wrote about this last week and a reader emailed me in response, reminding me that the only homeowners eligible for this new program are those FHA loan holders whose existing loan originated on or before May 29, 2009. The reader explained that his 5.25 percent FHA loan is not eligible because he took it out on April 10, 2010.

Looking at today's FHA rates, I see that a 4.00 percent 30-year fixed-rate loan can be obtained with little or no closing costs, depending upon the loan amount. On a $200,000 loan, this would mean almost $2,500 in interest savings in the first year compared to a rate of 5.25 percent.

The reader, rightly so, expressed his frustration at the seemingly arbitrary cutoff date for which FHA loans are eligible for this program. He suggested I write about it.

He's right. What difference does it make when the loan was originated? The whole point of lowering the fees, according to President Obama, is to encourage refinances and put more money in the pockets of consumers, so they can spend it and get the economy going.

So what, pray tell, is the practical motivation of locking out FHA loan holders who took out their loan after May 29, 2009?

Mortgage rates have fallen about 2 percentage points since late 2009. This means that those folks who locked their rates in the fall of 2009 may have rates that are up to 2 percent higher than today's rates, yet they are ineligible for this program because of the loan's origination date.

As much as I love my country and support our government, sometimes I think much of its effort is akin to digging a hole and filling it back up again.

Send email to henrysavage@pmcmortgage.com.

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