FHA currently has a really nice streamline refinance program in place. It is especially nice for those “under water” borrowers here in Arizona, because you don’t need to do an appraisal. Therefore, the Loan to Value (LTV) is not an issue. So you would think everyone who currently has a 30 year fixed FHA loan and an interest rate for 4.75% or more would be refinancing and saving a lot of money on their mortgage payment, right? Not right now and not since October 4, 2010. That is when HUD increased the monthly mortgage insurance from .55% to .90% on a 30 year fixed with an LTV greater than 95% to save the FHA insurance program. But at that same time they lowered the Upfront Mortgage Insurance Premium (UFMIP) from 2.25% to 1.0%. Hmmm, I didn’t get how that was saving the program? (UFMIP is in addition to the monthly amount that the borrower pays and is allowed to be financed on top of your loan amount.) It wasn’t long after and the monthly premium more than doubled from .55% rate prior to October 4, 2010 to 1.15%. It has been announced that this rate will go up again on April 1, 2012 to 1.25% for a 30 year fixed with an LTV greater than 95% for new FHA mortgages.
To illustrate the effect this had on a borrower payment here is a simplified example:
- The mortgage insurance on an FHA loan for $100,000
- Prior to October 2010: .55% was $45.83/month
- Currently as it is today at 1.15% it would be $95.83/month
You can see here when you more than double the monthly mortgage insurance it reduces the borrowers buying power a significant amount. It also makes refinancing even more difficult because now the additional monthly mortgage insurance premium negates the interest savings and therefore takes away the advantage of the refinance. So now instead of needing to save only one percent to make the refinance lower your monthly payment and make sense to do you really need to save about 2%. So as you can see the additional monthly mortgage insurance virtually shut down people’s ability to refinance with a lower rate.
It seemed like an easy fix to me. Just allow those who already have an FHA mortgage to be “grandfathered” in and allow them to keep their current mortgage insurance amount and therefore be able to refinance and take advantage of the lower interest rate and save the money on their mortgage each month. I just couldn’t understand why HUD would not allow this right away?
It really became clear to me how out of touch our government agencies were with reality when I attended a mortgage broker luncheon where a representative from HUD was a featured speaker. She made the comment that we can still do streamline FHA loans. She also said she didn’t understand why lenders didn’t want to do them? I was flabbergasted that she didn’t have a clue about what was going on. FHA also has a 5% net tangible benefit rule. This means that in order to refinance you must improve the borrower’s payment by at least 5% before you can refinance them. In my opinion that is not even enough! But the point here is that she was unaware of the fact that the increase in FHA monthly mortgage insurance premiums had made it impossible for most FHA mortgage holders to take advantage of the lower interest rates. So it was not that lenders didn’t want to do the loans, but they could not do the loans and benefit their borrowers.
The “easy fix” comes only a year and half later! Here in this March 6, 2012 article at Marketwatch.com they report that, “Under the revised FHA streamlined program for loans originated prior to June 2009, borrowers refinancing existing FHA loans would pay an up-front mortgage-insurance premium of 0.01%, down from 1%. The annual premiums will be cut in half to 0.55%.
The reductions could save the typical FHA borrower about $1,000 per year, according to the White House.
The lower fees come as the FHA announced last month that it was raising fees on new mortgages it insures as a means of limiting losses to its diminishing reserves. The up-front fee FHA charges for new loans will rise by 75 basis points or 0.75 percentage points on all single-family loans starting April 1. It is also raising the annual fees it is charging on loans of up to $625,500.”
That is great news for borrowers who took out an FHA mortgage prior to June 2009! But why not those who took out an FHA mortgage between then and October 2010 and already have a .55% monthly FHA MI rate? I hope this helps many people but I think it fails because it should do more for more people. It should also be noted that we are still waiting for notification from HUD. Those details are still officially pending.
Office: 602.279.7777 Ext. 101
Prostaff Mortgage Corp.
1644 E. Bethany Home Road
Phoenix, AZ 85016
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*Certified Residential Mortgage Specialist