One-Third of FHA Borrowers Could Refinance and Save Money, Urban Institute Says

A study released by the Urban Institute shows that more than one out of three consumers whose mortgages are backed by the Federal Housing Administration (FHA) can potentially save some money through refinancing, considering the federal agency has just reduced mortgage insurance premiums by half a percentage point.

Last month, the FHA reduced mortgage insurance premiums from 1.35 percent to 0.85 percent, and stressed that consumers can save an average of $900 per year with the new rates in place. Aside from that, Urban Institute researchers Karan Kaul, Laurie Goodman, and Jun Zhu believe that about 2.4 million FHA borrowers can save a considerable amount of money by refinancing at the lower premium rate of 0.85 percent.

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It has been a very interesting 2015 so far for housing market observers, as well as the many number-crunchers who have tried to come up with statistical estimates for the amount of money consumers can save through the new FHA premium rates, or the number of consumers who can save through refinances. This is also important because refinance activity is one of the primary variables that determines how the FHA monetizes mortgage premiums, as well as how much money the agency has in its coffers. The latter concern was a particularly contentious one in the aftermath of the housing market crash of the late 2000s.

Urban Institute’s researchers relied on the 6.6 million estimated FHA loans as a given, then removed a hypothetical 2.2 million consumers who may not qualify for a refinance, or may be best advised not to refinance. For the latter category, the FHA considered loans that were originated before June 1, 2009 (or those eligible for the agency’s Streamlined Refinance scheme), loans that have been modified, delinquent mortgages, or mortgages where the life of loan is 15 years or less, thus disqualifying them from the premium cut. Taking the remaining 4.4 million consumers, Urban Institute’s team created three sets of estimates based on how many are able to afford refinancing and the costs therein.

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The first group was qualified as the “conservative” group, meaning those borrowers who would rather wait until their annual savings are at 1 percent, new interest rate and lower premium rate included. For this group, about 1.7 million borrowers have potential to save through a refinance. The second group, conversely, made up the “aggressive” group, where about three million borrowers could save money. Urban Institute, however, added a qualifier – considering an aggressive 0.5 percent threshold for savings, the researchers noted that only a small percentage of borrowers “would find refinancing cost effective.”

Finally, the “base estimate” group used the hypothesis that most consumers can save at a 0.75 percent threshold, with the estimated number of consumers able to save under this hypothesis at 2.4 million.

Despite the wide mathematical range used by Urban Institute in its study, the researchers said that there are some variables that could skew real-world FHA refinance statistics, including mortgage rate gyrations. “If a large number of borrowers decide to wait in anticipation of even lower rates in the future, that would further reduce refinance volumes,” said Urban Institute. “Given what we know today, however, one in three FHA borrowers could certainly lower their monthly payments by refinancing.”