As with any mortgage there are fees associated with government-backed loans. Some people assume the government is the lender with FHA loans but that is not the case. FHA loans are simply loans that are backed or insured by the federal government. In other words regular banks lend the money but with an FHA loan it is like having Uncle Sam co-sign with you.
Having Uncle Sam co-sign means people with less than stellar credit can get an FHA home loan whereas the banks would have rejected them otherwise (though banks are requiring at least a 620 credit score even with FHA loans). Having government backing on a loan also means that borrowers can get up to 97% of the appraised value of a home with traditional FHA loans rather than the 80-90% limit most banks impose on conventional loans. The other advantage of an FHA loan is that rates are often comparable to the rates people with excellent credit receive from banks. FHA loans are often the best or only solution for people with not much equity or less than perfect credit. But the fee structures on FHA loans are similar to conventional loans. Here are the fees you should expect:
A. Bank Fees: These can range anywhere from about $1100 to $5000 depending on the size of the loan and the terms worked out. There are fixed fees that usually amount to about $1100 and then it is common for there to be a loan origination fee of at least 1% of the loan amount.
B. Title and escrow fees: These are fees charged by the title company and vary from state to state. It is common for these fees to tally $1000-2000. The larger the loan, the larger the title and escrow fees.
C. Pre-paid items: These are pre-payments on property taxes and homeowners insurance. FHA insists that taxes and insurance be included in the escrow account and paid monthly. While these aren’t fees (since you are simply paying ahead on taxes and insurance) they do need to be added to the loan amount or otherwise paid in advance.
D. FHA Upfront Mortgage Insurance Premium: There is a 1.75% mortgage insurance premium that Uncle Sam requires in exchange for essentially co-signing on your FHA loan. This mortgage insurance premium (along with the mandatory monthly mortgage insurance fees) helps keep the FHA solvent and able to pay the banks back when FHA borrowers default on their loans. This fee does not apply to conforming loans refinanced under President Obama’s Homeowner Affordability and Stability Plan.
An Example
So as an example you should expect fees on an FHA loan of about $150,000 to look something like this: ~$2500 in bank fees, ~$1200 in title fees, ~$1300 in prepaid items, and ~$2625 for the upfront FHA mortgage insurance premium. That adds up to more than $7500 added to the overall loan amount after the refinance. Be prepared for balance increases as you look to refinance.
The benefits of a wise refinance
Of course the upside to refinancing into a fixed-rate FHA loan often far outweighs the downside of a slightly higher mortgage balance. If you are in an adjustable rate mortgage (ARM) that is about to shoot up or just in a bad loan in general you can often lower your monthly payments by hundreds of dollars. Not only does a lower monthly payment ease your month to month burden but you will usually save a lot of money in the long run in spite of the refinance fees discussed here. As a general rule, the longer you plan to stay in your home the more sense getting a refinance makes.
