As with any mortgage there are fees associated with government-backed loans. Some people assume the government is the lender with government-backed loans but that is not the case. FHA, HARP, USDA, and VA loans are simply loans that are backed or insured by the federal government. In other words regular banks lend the money but with a government-backed 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 a government-backed home loan whereas the banks would have rejected them otherwise. Having government backing on a loan also means that upside down borrowers can refinance. The other advantage of an FHA or HARP loan is that rates are often comparable to the rates people with excellent credit receive from banks. FHA and HARP loans are often the best or only solution for people with not much equity or less than perfect credit. But while there are virtually no fees with the new FHA streamline program, the fee structures on HARP loans are similar to conventional loans. Here are the fees you should expect:
A. Bank Fees: These can range anywhere from about $1000 to several thousand depending on the size of the loan and the terms worked out. There are fixed fees that usually amount to about $1000 and then it is common for there to be an interest rate buy-down fee of about 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, homeowners insurance, and some loan interest. While these aren’t fees (since you are simply paying ahead on things like taxes and insurance) they do need to be added to the loan amount or otherwise paid in advance.
So as an example you could expect fees on a HARP loan of about $200,000 to look something like this: ~$1000 in fixed bank fees, $2000 to buy the interest rate down, and $1500 in title fees. That adds up to to about $4500 in fees added to the loan amount as a result of the refinance. However since you should be able to skip at least one mortgage payment (let’s say it is $1600) the net costs would be about $2900. If the refinance reduced payments $250 per month then the break even on the refinance would be less than a year ($2900/$250 = 11.6 months). With a break even of less than a year a refinance like that would make a lot of sense to a family who planned to own their home for several years to come.
The benefits of a wise refinance
Of course the upside to refinancing into a fixed-rate government-backed loan often far outweighs the downside of a slightly higher mortgage balance. If you are in an adjustable rate mortgage (ARM) that is at risk of to shooting up or just in a bad loan in general you can often lower your monthly payments by hundreds of dollars. As a general rule, the longer you plan to stay in your home the more sense getting a refinance to a lower or fixed interest rate makes.