Hey, Congress: Time to Help the Healthy Homeowner

Wed, 04 Mar 2009 21:05:09 +0000 – By Sharon Kehnemui LissSenior Editor for Politics, FOXNews.com

Let me guess, you're one of the 92 percent of homeowners in the country who isn't facing foreclosure and is able to pay your bills on time.

You're also a good financial risk and want to score a refinance that would let you save some money on your interest rate (money that would likely to be spent elsewhere, to help stimulate the hurting economy).

Join the club.

The Obama administration and lawmakers on Capitol Hill have said repeatedly that they want to help out responsible homeowners who find themselves in trouble.

Here's a suggestion: Stop making safe risks prove they are safe when they've already done so.

And here's a way to do it. Don't make credit worthy borrowers who want to refinance pay mortgage insurance that will drive their monthly mortgage rate right back up to its original cost.

Private mortgage insurers will say that lenders are taking the risk and therefore need some sort of protection that borrowers should pay. Some more cynical types would say private mortgage insurance is the government's way of helping insurers cash in on the housing market. (Let's not even delve into the number of instances when the investors in PMI are the same as the purchasers of the loan.)

The law mandates that if a homeowner wants to put down less than 20 percent on a house, and doesn't use the Federal Housing Administration then buyers have to pay PMI, which according to PrivateMI.org, an industry site, costs about $50 to $100 per month on a median priced home of $198,600. PMI is required until the mortgage balance is only 78 percent of the value of the house.

If the house costs more than that, the PMI costs more.

To avoid PMI, borrowers can put 20 percent down on a house, or -- at least when times were good -- find other ways to get around it like putting 10 percent down and getting a first and second loan of 80 percent and 10 percent respectively.

According to news reports, home prices have dropped on average 15 percent in the past year. At the same time, FHA interest rates are hovering around 5.25 percent, less on the open market.

That means anyone who is paying 5.75 percent or more on a loan could save at least a half percentage point on interest if he or she were able to refinance. (Closing costs are separate).

Now here's the dilemma for any upright borrower trying to refinance his or her home. To refinance on a home that has lost 15 percent of its value means being forced to pay PMI unless the borrower can come up with the cash to cover 20 percent of the lesser value of the home.

That means no savings in monthly payments on a home now worth around the median $198,600 with a 30-year mortgage.

For example, a borrower purchasing a home at its original value of $233,000, with 20 percent down would have a loan of $186,400. Monthly payments of principal and interest at 5.75 percent would be $1,088.

Now, go to refinance that home, which has since lost 15 percent of its value in the past year.

During that time, the borrower has paid off $1,989 in principal on the loan. So the house is now worth $198,050 and the loan is $184,410. What's the monthly rate for principal and interest? $1,029.

The savings each month with the lesser rate? $59. With the Obama administration promoting $13 a week in tax cuts for workers, $59 per month is nothing to sneeze at.

Except now, the house only has 5 percent equity in it and the PMI costs $50-$100 per month.

So once more the homeowner doesn't reap the benefit of the refinance. Over the life of the 30-year loan that would have been about $25,000.

Of course, the numbers go higher as the house is worth more.

It would be remiss not to stress here that the homeowner who is trying to refinance has already proved he or she is a good risk because of the demonstrated ability to pay 20 percent down on the higher valued house in the first place. Oh, and by the way, no payment has been missed.

So, it bears repeating to the administration and Congress: Lose the PMI, help the homeowner.