One in three Federal Housing Administration borrowers would benefit from refinancing.
That’s the conclusion of a study conducted by the Housing Finance Policy Center at the Urban Institute.
The Center’s Laurie Goodman, Karan Kaul and Jun Zhu took a closer look at the impact of the premium cut on FHA refinance volumes and have concluded that roughly 2.4 million current FHA borrowers could benefit from refinancing.
They started with 6.6 million existing FHA loans and excluded the following three categories of loans:
- 1.1 million loans originated prior to June 2009: Borrowers with FHA mortgages that were originated prior to June 1, 2009 are eligible for FHA’s Streamlined Refinance program. This program allows grandfathering of the pre-June 2009 annual MIP of 0.55%, and also reduces the upfront MIP to just 0.01% for these borrowers. Because these rates are significantly lower than FHA’s current premiums, pre-June 2009 FHA borrowers are essentially unaffected by the latest premium cut and are therefore excluded from our analysis.
- 0.8 million delinquent and modified loans: We also excluded 0.5 million borrowers who we estimated to be delinquent, and an additional 0.3 million with modified mortgages.
- 0.3 million loans with a term of 15 years of less: FHA’s latest premium cut does not apply to mortgages with a term of 15 years or less. These mortgages are also excluded from our analysis.
After excluding pre-June 2009 originated, delinquent, modified and mortgages with a maximum term of 15 years, (total 2.2 million), they estimated that roughly 4.4 million FHA borrowers could be candidates for refinancing.
In general, they found, borrowers stand to save money by refinancing if the new mortgage rate and the new FHA premiums, combined, result in a 0.75% reduction or more in annual mortgage costs.
“We used this as the base for our final estimate, assuming that the majority of borrowers would adopt this threshold,” they write. “Some borrowers are more conservative, of course, and might wait until their annual mortgage cost savings hits 1% to refinance, resulting in less refinance activity. Other borrowers are aggressive and might jump in when they stand to gain only 0.5%, which would result in more refinance activity. We’ve estimated these higher and lower triggers as well to give a clearer sense of the full range of potential refinance activity.
“Under our 0.75% threshold which we expect the majority of borrowers to adhere to, we estimate that roughly 2.4 million FHA borrowers could lower their mortgage payments even after accounting for refinancing costs. This represents over a third of the 6.6 million FHA borrowers,” they write.
Using a more conservative threshold of 1%, roughly 1.7 million borrowers could save money by refinancing.
At the more aggressive 0.5% threshold, their estimate rises to over 3 million.
“Our estimates are also based on the current FHA mortgage rate. A continued decline in rates could make refinancing appealing to a greater number of borrowers and would raise our estimates, whereas an increase in rates would lower them,” they write. “Other unknowns such as borrowers’ expectations of future mortgage rates can also affect refinance activity. If a large number of borrowers decide to wait in anticipation of even lower rates in the future, that would further reduce refinance volumes. Given what we know today, however, one in three FHA borrowers could certainly lower their monthly payments by refinancing.”