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A well-kept secret.

'No-Cost' Federal Housing Administration Refinancing Is Rare but Convenient for Some Homeowners

SKEPTICS, BEWARE: IT APpears you can get something for nothing, like a refinanced home mortgage for virtually no money down.

Homeowners don't have to spend $3,000 or more at the abstract company to lower their archaic Federal Housing Administration loan rates significantly. If they look hard, they can find a lender that offers an obscure FHA program called no-cost "streamline" refinancing.

Most lenders are avoiding the program, but the ones that do participate can lower an inflated FHA interest rate to around 8 percent for a 15-year mortgage or 8.5 percent for the 30-year version with virtually no costs. It's above the market rate, but there's not as much baggage.

Many homeowners who refinance FHA loans pay dearly for credit checks, origination fees, surveys, termite certificates and so on. If the costs are not financed, they can add up to 3-5 percent of the loan amount.

The up-front costs can be quickly recovered in lower mortgage payments, but that's no consolation for the many homeowners with very little savings.

"This really helps people who bought when appraisals were really high," says Julann Maness at Beach Abstract Co. in Little Rock.

Because property values have dropped, Maness says, some candidates for refinancing have been unable to get their houses appraised for as much as they owe on their mortgages.

The no-cost plan can be an especially smart one for a homeowner who doesn't plan to stay in his current house for many years.

The above-market interest rate on the no-cost refinancing eventually would cost the 30-year homeowner much more than the closing costs he avoided with no-cost refinancing. But the savings are immediate and meaningful in the short term.

The streamline refinance plan can involve a few minor costs, but most are made up when the rebate check arrives from the old mortgage.

Central Mortgage Corp. in Little Rock, which just began promoting its no-cost FHA refinancing, charges a $200 "good faith" deposit to its streamline customers. The deposit is refunded at closing but can be forfeited if an applicant is not approved for the new loan or backs out of the deal.

A Few Catches

Robert Coleman, Central Mortgage president, says homeowners won't qualify for no-cost refinancing at Central if they've been late on any mortgage payments during the previous 12 months.

Central also collects up front for the new escrow account and prorated interest charges. Shortly after closing, the borrower receives a rebate check closing out the escrow account of his old loan.

Some lenders simply allow the borrower to roll over an escrow account from an old FHA loan into the new mortgage without cutting a check and waiting on a rebate.

Who benefits from this little-known program? For starters, it's the homeowner who took out a $60,000 FHA loan in late 1991 at 9.5 percent interest. He's strapped for cash and sees no wisdom in shelling out several thousand dollars to refinance. By going with the streamline plan at 8.5 percent, he can save $500 a year on house payments right away.

The thousands in interest he has already paid is lost, but it could be recovered eventually through the lower house payment.

Another candidate for the streamline plan is the woman who bought her house in 1985 on a 30-year FHA loan at 10.5 percent. She can go with the 15-year refinancing, lowering her interest rate to about 8 percent. Because her interest payments on the 15-year loan will be much lower, her former interest payments might not seem wasted.

It's possible to convert to a no-cost, 15-year loan, but there is a restriction: The new monthly principal and interest payment can't increase by more than $50 in the process.

From a mortgage company's perspective, it can be just as lucrative to refinance at no cost as it is to offer the traditional refinancing package. The lender gets a loan at an above-market interest rate, which makes up for the loss of income from origination fees. This benefit is passed on to the larger companies that typically buy mortgages from the local banks.
Cash on the Table
Typical FHA Closing Costs for a Refinanced Loan
$2,250 FHA mortgage insurance protection(*)
200 Escrow or closing fee
50 Title search close-up
100 Document preparation
310 Title insurance
25 Tax report
20 Recording Fees
150 Survey
65 Termite Letter
750 Origination Fee
200 Appraisal
45 Credit report
150 Misc. lender's fees
231 Prorated interest (average of 15 days)
$4,546 Total(**)
* -- MIP can be financed into the loan.
** -- The total does not reflect advance tax and insurance
payments for the escrow account. Closing in June, seven months
of property taxes would be required. An insurance policy that
comes due in December would require nine months of insurance.
Of course, those who refinance receive an escrow rebate check
from their former mortgages after closing.
Source: Beach Abstract & Guaranty Co. Actual figures may vary.

Consider a 30-year, $75,000 mortgage at 8.5 percent interest. Over the life of that loan, the mortgage bank will make almost $19,000 more in interest than it would off the same loan at 7.5 percent.

But most people don't stay in the same house for 30 years.

Comparing the same loans over five years, the "no-cost" version racks up only $3,800 more in interest expenses than the conventional refinance. But that is about the same amount a homeowner would put down in cash for lower-interest refinancing, so it's a "wash."

All the while, the homeowner choosing no-cost refinancing is deducting more interest on his tax return than the homeowner who goes the conventional route.

Dissenting Opinion

Not everyone in the lending business is excited about no-cost streamline refinancing. In fact, only a few local companies such as Central and Norwest Mortgage Inc. offer the plan.

"There's not necessarily that much of an advantage," says Jim Sullivan, president of Worthen Mortgage Co.

His company doesn't do the no-cost FHA financing, partly because he doesn't consider it a good long-term investment.

Sullivan says most of the companies focusing on the no-cost niche are either out-of-state firms looking to expand or fairly small, new mortgage companies in the state trying to get their names established.

It is, however, a legitimate government program that could prove useful to many homeowners.
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Article Details
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Title Annotation:'no-cost' mortgage refinancing
Author:Haman, John
Publication:Arkansas Business
Date:Jun 28, 1993
Previous Article:Simmons carves niche.
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