- - Thursday, March 15, 2012

It appears there may be some very good news for homeowners with loans insured by the Federal Housing Administration (FHA).

Despite the ultralow interest rates currently offered by the FHA, many borrowers cannot refinance, even if they fully qualify.

The main reason is that the cost of mortgage-insurance premiums (MIP) has increased in recent years. An FHA borrower seeking to refinance his house certainly can lower his interest rate and drop his principal-and-interest (P&I) payment. But the refinance would require a higher monthly MIP payment.

Here’s a real-life example:

I received a call from a borrower seeking to refinance his FHA loan, which has a current balance of $204,000. His current rate is 5 percent. His monthly P&I payment is $1,159. He also pays a monthly MIP of $96.

I see he can refinance to a rate of 4 percent and receive a lender credit in the amount of about $4,000 to cover the costs of the refinance. His new P&I payment drops by $185, to $974 monthly. Not bad.

Here’s the problem under the current rules: The new annual MIP, which is paid monthly, would increase from .55 percent to 1.15 percent. Instead of paying $96, his new monthly MIP payment increases to $196, which means his overall payment would decrease by just $53 per month.

Even if my borrower was prepared to go through the paperwork to save $53 each month and the $4,000 closing cost credit exceeded the actual closing costs charged, there’s another problem resulting from the upfront mortgage insurance premium (UFMIP). The FHA, in addition to charging a premium that’s part of the mortgage payment, charges an additional 1 percent in UFMIP. This must be paid out of pocket or financed in the loan amount. So my borrower must either increase his loan amount by $2,040 or pay that sum out of pocket.

It gets more complicated. My borrower may be due a refund of the “unused” portion of the old UFMIP from the last loan. This number is likely to be very small, if not zero.

Wait. The problem gets even more complicated. Even if I determine that despite these extra costs, it makes sense for the borrower to refinance to 4 percent, he may only qualify for an FHA “streamline” refinance. In those cases, the UFMIP must be paid out of pocket. I can tell you that most folks are unwilling or unable to do so.

And you wonder why our federal government is riddled with red tape.

But here’s the good news. For streamline refinances only, FHA is lowering its annual MIP back down to .55 percent from the existing 1.15 percent. This would not increase my borrower’s MIP payment. Even better, FHA is lowering the UFMIP from the existing 1 percent to 0.01 percent. My borrower’s UFMIP drops from $2,040 to $20.40.

These changes, announced last week by Acting FHA Commissioner Carol Galante, are slated to go into effect on June 11. Stay tuned. This could be a very good thing for homeowners with an FHA loan. I’ll keep you posted.

Henry Savage is president of PMC Mortgage in Alexandria. Send email to henrysavage@pmcmortgage.com.

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