How to cut interest rate, cost of loan insurance

Nation's housing

April 08, 2001

MOST HEADS-UP homeowners know that mortgage rates have dropped 1.5 percentage points in the last 10 months. They also probably know that, as a result, there's a refinancing boom under way.

But thousands of them appear to be missing one of the sweetest and least-publicized opportunities within the national refinancing boom - a situation where you can not only lower your mortgage rate, but also get substantial cash from the federal government for doing so.

Here's the deal. Since Jan. 1, the largest federal source of money for low down payment mortgages - the Federal Housing Administration - cut the amount of the insurance premium it charges new borrowers for their loans. The 2.25 percent standard premium was reduced to 1.5 percent.

On a $150,000 FHA loan, the difference between a premium of 2.25 percent and 1.5 percent comes to $1,125 - considerably more than chump change for the nearly 1 million households expected to take out a new FHA mortgage this year.

That's fine for them, but what about the far larger numbers of people who already have FHA mortgages? Could there be any way to cut them into the big savings from the FHA premium reduction? You better believe it - and yet for most of the 2 million-plus potential beneficiaries, it's still a deep, dark secret.

Many of those homeowners may not realize it, but they have at least a fleeting opportunity to join the refinancing boom, and get a hefty refund from the federal government to boot. That's because under guidelines issued by the FHA, the federal government will refund portions of recent homebuyers' insurance premiums when they refinance early in their loan terms.

This can be especially advantageous for FHA borrowers who closed their loans during the past three years. They not only may be able to cut their interest rate and monthly outlays, but also can get back a premium refund of $500-$900 or even more. And as icing on the cake, they can do it all with little or no out-of-pocket closing expenses for the refinancing.

Consider this real-life example of the new FHA refinancing double-play technique provided by a mortgage brokerage firm that's doing substantial numbers of them - PMC Mortgage Corp. of Alexandria, Va. The homeowner in this case had obtained a $163,000 FHA mortgage at 8.5 percent in February 2000. Her mortgage insurance premium at the then-prevailing 2.25 percent rate came to about $3,600 and was rolled into her loan amount to be financed over time.

With the sharp decline in mortgage rates since then, she became an excellent candidate for the FHA refinancing double-play. PMC president Henry Savage, a specialist in "zero-cost" refinancings, toted up the numbers for the homeowner and found that she could:

Cut her interest rate from 8.5 percent to 7.25 percent and lower her monthly mortgage payment by $145.

Qualify for an $868 refund from the FHA based on the difference between her premium at the 2.25 percent old rate and the new 1.5 percent rate.

Pay virtually no closing costs or fees out of pocket to make it all happen.

As with all "zero cost" refinancings, the new interest rate on the note would be slightly higher than the lowest rate available in the market - a difference of about a quarter of a percentage point. But the rate cut from 8.5 percent to 7.25 percent was irresistible. So was the federal Form 2502 she recently received from the FHA, lining her up for an $868.08 "premium refund" from the Treasury in the next two or three months.

Savage said the FHA refinancing double-play is the "best kept secret" in the national mortgage market place. To make it work for you, there are several requirements. First, you need to have closed your current FHA loan within the past two to three years to get the benefit of the differential in the insurance premium rate. You need an interest rate on that loan of 8 percent or higher - not difficult at all for thousands of homebuyers who closed last year before the rates began to decline.

And you'll need to refinance into a new, lower-rate FHA mortgage with a principal balance no larger than the one you're replacing.

Ideally, Savage said, you should take advantage of the availability of zero-cost, "streamline" refinancing programs for FHA, which allow you to finance your closing costs.

How do you get the ball rolling? If you think you might qualify, contact the lender that now services your FHA mortgage and ask whether it offers a zero-cost refinancing program. If not, shop around for a mortgage broker or bank that does.

After all, it just might be the last time in your life as a homeowner that the federal government pays you bonus money to lower your interest rate and cut your monthly housing bills.

Kenneth R. Harney is a syndicated columnist. Send letters in care of the Washington Post Writers Group, 1150 15th St. NW, Washington D.C. 20071.

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