FHA reducing fees on mortgage refinancings this summer

Hand holding pen and signing mortgage next to a house

The Federal Housing Administration will put some of its home loans on sale starting in June, offering low-fee refinances for its current borrowers who took out mortgages before June 2009.

Starting June 11, borrowers can take advantage of the revised streamlined refinancing program by paying a 0.01% mortgage insurance premium at closing and an annual insurance fee of 0.55% of the loan.

Those are significantly lower fees than borrowers now pay. Most paid a 1% percent mortgage insurance premium up front plus 1.10% to 1.15% every year.

For every $100,000 financed, the up-front fee would fall from $1,000 to just $10, while the annual fee will fall from $1,150 to $550.

To take advantage of the sale, you have to meet three conditions:

-- No late home loan payments for the past 12 months.
-- Your FHA loan has an effective date (typically about a week after closing) on or before May 31, 2009.
-- You have enough cash on hand to pay closing costs.

The Obama administration thinks 3.4 million homeowners with FHA loans carrying interest rates above 5% will be able to meet those conditions and predicts the average homeowner will save $250 a month, or about $3,000 a year, by refinancing. (This includes savings from both a lowered interest rate and the lower fees.)

"It could lead to a lot of refinancing," said John Walsh, president of Total Mortgage in Milford, Conn.

If you are underwater on your loan, that’s not going to be an issue, he said, because you don’t have to have your house appraised -- as long as you can pay for your closing costs out of pocket when you refinance and you meet other conditions.

"You’ll have to come to the closing table with maybe $1,500 to $2,000 to pay for closing costs like the credit report, escrows and underwriting or bank fees and attorney fees for title insurance and representation," Walsh said.

Homeowners who don’t have cash for closing costs might be able to work around the issue by paying a slightly higher interest rate.

Even though FHA’s sale doesn’t start until June, Walsh recommends homeowners call their lenders now to get going, because nobody knows where interest rates are headed and qualification rules change all the time.

"Give yourself time to get into a position to take advantage of the changes on June 11," he said. "Have your credit report run, see if you qualify and see if it makes sense to refinance."

The refinancing discount comes as increased fees are set to take effect on new FHA home loans.

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