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Little-Known Mortgage Offers a Sweet Deal


WASHINGTON — Most heads-up homeowners know that mortgage rates have dropped 11/2 percentage points in the last 10 months. They also probably know that as a result, there's a refinancing boom.

But thousands of them appear to be missing one of the most golden and least-publicized opportunities within the national refinancing boom-a situation in which you can lower your mortgage rate and get substantial cash from the federal government.

Here's the deal. Effective last 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 21/4% standard premium was reduced to 1.5%. On a $150,000 FHA loan, the difference between a premium of 21/4% and 11/2% comes to $1,125-considerably more than chump change for the 1 million households expected to take out a new FHA mortgage this year.

That's fine for them, but what about the larger number of people who already have FHA mortgages? Could there be any way to cut them into the big savings from the FHA premium reduction? You better believe it-and yet for most of the 2 million-plus 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 refinance boom, and get a hefty refund from the federal government to boot. That's because under guidelines issued by FHA, the federal government will refund portions of recent home buyers' insurance premiums when they refinance early in their loan terms.

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

Consider this real-life example of the new FHA refinance 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 81/2% in February 2000. Her mortgage insurance premium at the then-prevailing 21/4% 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 refinance double-play. PMC President Henry Savage, a specialist in "zero-cost" refinances, toted up the numbers for the homeowner and found that she could:

* Cut her interest rate from 81/2% to 71/4%, and lower her monthly mortgage payment by $145.

* Qualify for an $868 refund from FHA based on the difference between her premium at the 21/4% old rate and the new 11/2% rate.

* Pay virtually no closing costs or fees out of pocket to make it all happen.

As with all "zero-cost" refinances, the new interest rate on the note would be slightly higher than the lowest rate available in the market-a difference of about 1/4 percentage point. But the rate cut from 81/2% to 71/4% was irresistible. So was the federal Form 2502 she recently received from FHA, lining her up for an $868.08 "premium refund" in the coming two or three months.

To make it work for you, there are several requirements. First, you need to have closed your current FHA loan sometime 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% or higher.

And you'll need to refinance into a lower-rate FHA mortgage with a principal balance no larger than the one you're replacing.

Ideally, Savage says, you should take advantage of zero-cost, "streamline" refinance programs for FHA, which allow you to finance your closing costs.

How do you get the ball rolling? If you think you might qualify, contact the lender that services your FHA mortgage and ask whether it offers a zero-cost refi program. If not, shop around for a broker or bank that does.

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