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Why It Might Be Time to Refinance Your Mortgage

January 21st, 2015 10:25 AM by Jackie A. Graves

For sale sign on house. Story on mortgage refinance and FHA loans. Associated Press


A perfect storm of low mortgage rates, rising home prices and a decision by the Obama administration to lower the fees charged by a popular federal program could lead hundreds of thousands of borrowers to seek to refinance over the coming year.

Last Thursday, President Barack Obama said that the Federal Housing Administration would lower the annual fee it charges a typical borrower to 0.85% from 1.35%. The FHA doesn’t make loans but sells insurance to make investors whole in case of default. Borrowers pay for the insurance and are eligible to buy it on mortgages that have down payments of as little as 3.5%.

That decision came on top of mortgage rates that had already fallen steeply over the past few months. In the week ended last Thursday, the average 30-year fixed-rate mortgage cost 3.73%, according to Freddie Mac, its lowest point since May 23, 2013.

With that in mind, you might have a few questions about the new program and whether it makes sense for you.

What’s happening?

The FHA on Jan. 26 will reduce the annual premiums it charges many borrowers. For those who make a down payment of less than 5% and take out a loan of $625,500 or less, the premium will be reduced to 0.85% from 1.35%. On a $200,000 loan, that would save a borrower about $1,000 in the first year.

Borrowers who make a down payment of 5% or higher will see their premium reduced to 0.8% from 1.3%. These premiums are for mortgages with a term of more than 15 years; premiums for shorter-term loans aren’t changing.

Right now, borrowers must pay for FHA insurance for the life of a loan, even if their home equity rises above 20% of the value of the home. That also doesn’t change with the announcement.

Will people who already have an FHA loan see their insurance costs reduced?

No. Rather than retroactively change the insurance premiums charged to borrowers who already have FHA-insured mortgages, the FHA will require borrowers to refinance if they want to get the new rate. That’s led some analysts and lenders to expect a sharp rise in FHA refinances in the coming year, though estimates vary depending on expectations of overall mortgage rates.

What if I’m already in the process of getting an FHA-insured loan? Will I get the new rate?

Maybe. It’s probably too late if your loan has already closed. It also might be too late if you’re buying a home and your loan closes very soon, such as in the next few days, unless you have a very understanding seller.

If your loan closes toward the end of the month or the beginning of February, your lender should be able to cancel your loan’s so-called FHA Case Number and reapply for a new one at the new rate. Some lenders say that they’ll do that automatically. That includes the biggest FHA-lender, Quicken Loans, saays Quicken Loans vice president Bill Banfield.

But no matter when your scheduled closing is or who your lender is, make sure you ask.

Will it make sense for me to refinance at the new rate?

It could—especially if you got an FHA-insured mortgage in mid to late 2013. That’s when the average rate on a 30-year fixed mortgage spiked to 4.5% and it was after the FHA enacted its last price hike to 1.35%. As a general rule of thumb, refinancing a mortgage makes financial sense if you get a break of at least a percentage point, or more or less depending on how long you plan to keep the loan.

That required break is one reason why some economists’ expectations for a new refinancing boom were tempered before the FHA announced its rate cut. The central issue: A huge proportion of borrowers already have a mortgage at a very low rate. Mr. Obama’s decision to lower FHA premiums, however, could make the decision easier for many homeowners.

refinance graphic

If I want to refinance, how should I go about doing it?

Read this article. The short version: Use a tool such as those at or to compare lender offers in your area. See if your existing lender or bank will give you a break on your rate or closing costs by virtue of your existing relationship. And have the lender help you calculate a break-even amount of time you’d have to keep the loan to make the closing costs make sense.

The FHA also offers a special “streamline refinance” process that cuts down on the paperwork needed to refinance a loan and can lower costs.

What about buying a home? Could this tip the scales in favor of buying instead of renting?

The White House certainly thinks so. On the day of the announcement, the White House gave an estimate that the cut would spur 250,000 new home buyers to purchase a home. Given that the White House also said that the decision would save a typical FHA borrower about $900 annually, that might seem optimistic, but it is true that incremental changes can make a big difference to the extent that buyers had been barely priced out of a home before the change.

“The first thought we had was about purchases,” said Quicken Loans’ Mr. Banfield. “We wonder if this could help make more people renting decide to purchase a home.

So rates will never be this low again, right?

That’s what they’ve said every year since the financial crisis, but apart from the spike in mid-2013, analysts and economists have generally been wrong on this issue.

Just as it’s difficult to predict moves in the stock market, it’s difficult to predict what will happen with bond yields and mortgage rates. Narratives that you hear about the Federal Reserve preparing to hike interest rates (and earlier, the wind down of its bond-buying program) are likely already priced into the market. So anything that moves mortgage rates significantly—up or down—will by its nature be unexpected.

But, yes, mortgage rates are very low by historical standards, and if you lock it in at current levels, you’re unlikely to regret doing so.

By: Joe Light | To view the original article click here

Posted by Jackie A. Graves on January 21st, 2015 10:25 AM


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