Study: One in Three FHA Borrowers Could Save Money Refinancing

More than one in three homeowners with mortgages backed by the Federal Housing Administration (FHA) could stand to save money by refinancing now that the agency has lowered its annual mortgage insurance premium, according to a study released by the Urban Institute (UI).

As a result of last month's 0.5 percentage point cut in premiums (bringing them down to 0.85 percent), UI researchers Karan Kaul, Laurie Goodman, and Jun Zhu estimate that roughly 2.4 million existing FHA borrowers could benefit by refinancing their mortgage at the lower premium.

Ever since President Barack Obama first made the announcement of the reduction last month, economists have tried to calculate the number of potential refinancers who could benefit, particularly since that activity is a key driver of FHA's premium revenues and of the health of the agency's insurance fund, which has been light in recent years as a result of the housing meltdown.

The team came to that total by taking the pool of existing FHA loans—about 6.6 million—and removing about 2.2 million with characteristics that make unable or less than ideal for refinancing. Those groups include loans originated prior to June 1, 2009 (which are eligible for FHA's lower-rate Streamlined Refinance program); delinquent and modified loans; and mortgages with terms of 15 years or less, for which the premium cut does not apply.

Out of the remaining 4.4 million borrowers, the group made three separate estimates for expected refinance candidates based on how many can afford the initial costs of refinancing and how many would benefit measurably from the savings:

• Conservative borrowers: Looking at just those homeowners who would wait until their annual savings (including the new interest rate and reduced premium) hits 1 percent, the researchers calculate that roughly 1.7 million borrowers could save money by refinancing.
• Aggressive borrowers: At a more aggressive 0.5 percent savings threshold, the group says as many as three million borrowers could save. That estimate, however, comes with the note that "very few borrowers ... would find refinancing cost effective at the 0.5 percent threshold."
• The base estimate: Reasoning that most borrowers would save at a 0.75 percent threshold, the pool comes in at about 2.4 million who could lower their mortgage payments appreciably.

Even working within that wide range, the team notes that there are a few unknowns that will likely creep into market demand for FHA refinances, including changes in mortgage rates—whether observed or simply anticipated.

"If a large number of borrowers decide to wait in anticipation of even lower rates in the future, that would further reduce refinance volumes," they wrote. "Given what we know today, however, one in three FHA borrowers could certainly lower their monthly payments by refinancing."