Here's the deal. Effective this past Jan. 1, the largest federal source of low-down-payment mortgage money - the Federal Housing Administration (FHA) - 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 refinance boom and get a hefty refund from the federal government to boot. Under guidelines issued by 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 right now for FHA borrowers who closed their loans during the past three years. Not only may they be able to cut their interest rate and monthly outlays, but they can get back a premium refund of $500 to $900 or more. And as icing on the cake, they can do it all with little or no refinance closing expenses out of pocket.
Consider this real-life example of the new FHA double-play technique provided by a mortgage-brokerage firm that's doing substantial numbers of them - PMC Mortgage of Alexandria, Va.
The homeowner in this case had gotten 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 double-play. PMC President Henry Savage, a specialist in "zero-cost" refinances, totaled 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 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" refinances, the new interest rate on the note would be slightly higher than the lowest rate available in the market - a difference of about 1/4 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 FHA, lining her up for an $868.08 "premium refund" from the Treasury in the coming two or three months.
Savage says the FHA refinance double-play is the "best-kept secret" in the national mortgage marketplace.
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 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 says, 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 currently services your FHA mortgage and ask whether it offers a zero-cost refinance program. If not, shop around for a mortgage broker or bank that does.
(c) 2001, Washington Post Writers Group
