Obama cuts refinance costs for some mortgages.
Obama cuts refinance costs for some mortgages
NEW YORK (CNNMoney) — Borrowers with some federally insured mortgages will be able to refinance into lower interest rate loans more easily and cheaply under a plan unveiled Tuesday by the Obama administration.
At a news conference, President Obama announced that the Federal Housing Administration will cut upfront fees for refinanced loans it already insures.
The new fees are for borrowers whose FHA loans were issued before June 1, 2009. An estimated 2 to 3 million borrowers could take advantage of the savings, which could reduce mortgage payments for the typical FHA borrower by about a thousand dollars a year, according to the administration.
“It’s like another tax cut in people’s pockets,” said President Obama.
Borrowers who refinance their existing FHA loans will pay an upfront insurance premium equal to 0.1%, the lowest allowable rate, of the mortgage amount — $100 for a $100,000 loan — plus an annual fee of 0.55%.
The new refinancing fees contrast sharply with the cost of obtaining a FHA loan, according to Jaret Seiberg, an analyst with the Washington Research Group. A borrower making a 3.5% down payment on a home purchase as of April 1 will pay a 1.75% upfront fee and a 1.25% annual fee. Those purchase fees were raised barely a week ago to improve the FHA’s capital reserve.
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Still, lowering refinancing fees “should be broadly positive for housing and the economy by reducing foreclosures and freeing up income for consumers to spend on other goods and services,” Seiberg said.
The new policy will also make it easier for the banks to refinance loans because it directs the FHA not to count the loans toward the lender’s “compare ratio.” That calculates the performance of loans issued by the lenders and compares it to the performance of other lenders.
Some lenders have not wanted to refinance FHA loans because many of them were made during years of high default rates, according to Seiberg.
Knowing that the FHA will not hold refinanced loans against them should they fail to perform could make lenders more willing to refinance loans for borrowers at a higher credit risk, according to Jay Brinkmann, chief economist for the Mortgage Bankers Association.
