FHA Insurance Premium Cut Results in Borrower Refunds.

ALERT homeowners know that mortgage rates have dropped significantly in the past 10 months. They also probably know that as a result, there's a refinancing boom underway.

But thousands of them appear to be missing one of the sweetest and least-publicized opportunities in the refinancing boom -- a situation where you can not only lower your mortgage rate, but also get substantial cash from the federal government for doing so.

Here's the deal. Effective Jan. 1, the largest federal source of low-down-payment mortgage money, the Federal Housing Administration, 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 number of people who already have FHA mortgages? Is there a way to cut them into the big savings from the FHA premium reduction? You better believe it, and yet, for most of the more than 2 million potential beneficiaries, it's still a secret.

Many of those homeowners may not realize it, but they have at least a fleeting opportunity to join the refinancing boom -- and get a hefty refund from the government to boot. That's because, under guidelines issued by the FHA, the government will refund portions of recent homebuyers' insurance premiums when they refinance early in their loan terms.

Refunds available

This can be especially advantageous right now for FHA borrowers who closed their loans in the past three years. Not only may they be able to cut their interest rate and monthly outlays, but also they can get back a premium refund of $500 to $900 or even more. As icing on the cake, they can do it all with little or no refinancing closing expenses out of pocket.

Consider this real-life example of the new FHA refinancing double play technique provided by a mortgage brokerage firm that's doing substantial numbers of them -- PMC Mortgage Corp. of Alexandria, Va. The homeowner in this case had obtained a $163,000 FHA mortgage at 8.5 percent. 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 refinancing double play. PMC President Henry Savage, a specialist in "zero-cost" refinancing, toted 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 the 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.

As with all "zero-cost" refinancing, the new interest rate on the note would be slightly higher than the lowest rate available in the market -- a difference of about one-quarter of a percentage point. But the rate cut from 8.5 percent to 7.25 percent was irresistible. So was the federal Form 2502 that she recently received from the FHA, lining her up for an $868.08 "premium refund" from the Treasury in the next two or three months.

FHA requirements

Savage says the FHA refinancing 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 at all 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 loans, which allow you to finance your closing costs.

Kenneth Harney is a columnist for The Washington Post Writers Group.