Hidden cost of the extension to the payroll tax reduction

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I’m sure everyone at some point read or heard about the debate over whether or not to extend the payroll tax reduction. It was yet another point of contention in D.C. (isn’t everything these days?… I digress…). In late December, the government came to an agreement to extend the payroll tax reduction. This keeps some extra money in the pockets of every working American and is a help for small business owners too.

Whether or not you agree with the decision, the interesting thing this time was HOW the lost money from the reduction will be covered. The money has to come from somewhere. In this case, the money to compensate for the reduction in payroll tax is being covered through new mortgages.

That’s right… people looking to buy homes OR current home owners looking to refinance will foot the bill. Here’s how:

  • The government proposed to pay for the estimated $33 billion cost caused by the reduction through new mortgages. This will affect both conventional and FHA loans.
  • For conventional loans (Fannie Mae/Freddie Mac), the new mandatory loan fees will be worked into the interest rates. Look for interest rates to rise by 0.125% to cover these mandatory fees until the $33 billion is covered. While this isn’t the end of the world, it will still cause rates to rise.
  • For FHA loans, the monthly mortgage insurance premium is going up (again) by another 10 basis points. This is the 5th increase to the monthly mortgage insurance premium on FHA loans in the last 5 years!

How is this going to impact those looking for a new mortgage? If buying a home, it is what it is. Someone looking to buy can’t control interest rates, and can’t really do anything until they are ready to buy. I wouldn’t rush out the door and buy the first home just because of this.

The more interesting impact will be those current home owners looking to refinance. With mortgage rates for conventional and FHA loans currently in the 3’s, homeowners who are still hoping to squeeze out another 0.125% before beginning the refinance process need to think about moving forward now. We are already at historic lows. Once this extra 0.125% kicks in, it will make it tougher to improve on where rates stand as of this posting.

Also, homeowners with FHA loans thinking about doing a streamline refinance need to get started now. In order to qualify for an FHA streamline refinance, the new mortgage payment + the monthly mortgage insurance payment must be 5% less than what they are currently paying. For homeowners who bought their home with an FHA loan prior to the monthly mortgage insurance premium doubling in 2010 are already having a tough time in some cases qualifying for the streamline refinance. When you add another 10 basis points to the monthly mortgage insurance premium on FHA loans, thousands of FHA mortgages will be ineligible for a streamline refinance with rates at their current levels.

Thinking about refinancing? Now is the time to start. If you are in the state of Georgia, I can help get the ball rolling. Contact me and we’ll take it from there!

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