Refinance before June 3rd to avoid FHA rule changes

Thinking about refinancing your existing mortgage, or taking out a new one? Don't delay, or it could cost you. Some Federal Housing Administration (FHA) changes involving tighter lending standards and higher mortgage insurance premiums already took effect on April 1st, while others are on the way - and these changes could make a dent in your wallet.

So what's prompting these changes? They come in the wake of the FHA's Mutual Mortgage Insurance Fund - which is used to fund homeowner programs - announcing a deficit of over $16.3 billion for fiscal year 2013.

"All these changes that the FHA is implementing are not surprising considering the struggle to maintain their mandated reserve requirement," says Irene Moustakas, a California mortgage broker with Granite Financial. "But it translates to loans and payments that are more expensive for consumers."

Keep reading to learn about more FHA changes that will take effect on June 3rd, and how it'll affect your home purchase or refinancing opportunities.

You Might Have to Pay Mortgage Insurance for the Life of the Loan

After the FHA changes come into effect on June 3rd, most homebuyers with a case number after this date will have to pay mortgage insurance for the life of the loan - unless they put a down payment of more than 10 percent, according to Mortgagee Letter 2013-04 issued by the U.S. Department of Housing and Urban Development (HUD) on January 31, 2013.

This means you'll have to either put down more money upfront, or you'll face paying mortgage insurance over the life of your loan.

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"If you wait until after June 3rd, then you must pay [mortgage insurance] for either 11 years, or the life of the loan, depending on how much you finance," Moustakas says. "If you put down 10 percent or more, then the annual mortgage premium can be eliminated after 11 years. So if your loan amount is $400,000, with this 10 percent down payment scenario, that's an additional $31,200 you will be paying for insurance [over the life of the loan]."

If, however, you get a case number for a mortgage or refinance before June 3rd, you can stop paying mortgage insurance once you reach 22 percent equity in your home - and the savings can be significant.

The bottom-line benefit is savings in your pocket, according to Moustakas. The trick is to secure an FHA case number prior to June 3rd.

There Will Be Minimum Equity Increase for Jumbo Mortgages (over $625,500)

Do you have at least 5 percent equity in your home, or for a down payment?

If you are considering refinancing or getting a mortgage over $625,500, the required down payment (or equity in the home if it's a refinance) will rise from 3.5 percent to 5 percent of the home value, according to a FHA Federal Register Notice dated February 6, 2013. This means that your mortgage amount cannot exceed 95 percent of the home value.

"On that sort of loan amount and purchase price, that's a lot of money," says Moustakas - almost $33K you'll have to come up with on a $650,000 loan, for example.

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Moustakas says the combination of the impending increased down payment requirements, and the annual insurance premium increase from April 1st, mean people considering taking on or refinancing a big mortgage should act today.

"Right now you would be able to get into a home with FHA financing for less money down than what will be required in the future."

Mortgage Interest Rates are Increasing - Regardless of the Loan You Have

If the upcoming FHA changes don't seem like much to be concerned about, consider this: According to the Mortgage Bankers Association (MBA), mortgage interest rates are predicted to reach a whopping 4.3 percent by the fourth quarter of 2013.* And that could be a reason in itself to refinance now - regardless of if you'll be affected by the FHA changes.
Let's take a look at how much of an impact this can have on your wallet.  Below is a comparison of a $400,000, 30-year fixed-rate mortgage with an interest rate of 3.76 percent (the March 29, 2013 average according to the MBA), and the predicted 4.3 percent:

With just an increase of a little over half a percent in interest rates, the monthly payment is $124.76 higher, with almost $45,000 extra paid over the life of the loan in interest. Now that sounds like a good reason to refinance.

* Interest rate predictions are as of March 22, 2013.