Fees rising on low-cost mortgages

This post comes from Marilyn Lewis of MSN Money.

Although interest rates are rolling along at historic lows, mortgage fees are rising, pushing up the total cost of a home loan or refinancing.

The Federal Housing Administration announced this week that it will hike the cost of its mortgages to raise funds and replenish its depleted accounts. (The FHA is losing money on its riskier loans. This Washington Post editorial describes the reasons and the agency's need for a bailout.)

The hikes will have the most effect on first-time homebuyers and others who haven't got a 20% down payment, says the Center for Responsible Lending.

The FHA insures loans. It approves borrowers with smaller down payments and less-stringent qualifications. "People with credit scores of 580 or more can put down as little as 3.5%," says The New York Times. (Post continues below.)

The FHA is supposed to cover these added risks through its charges to borrowers for a mortgage insurance premium, or MIP. The FHA charges two MIP fees: a one-time "upfront" fee, which is paid when you get the loan and can be rolled into your loan costs, and monthly premiums.

Here are the changes:

• For loans under $625,500, MIP monthly premiums will rise from 1.15% to 1.25% of the loan amount, starting April 1.
• For larger loans, annual premiums (paid monthly) will grow 0.35 of a percentage point to 1.5% of the loan amount, starting June 1.
• For all loans, the upfront fee will rise from 1% to 1.75% of the loan amount.

The Times did the math for a $200,000 home purchase with 3.5% down and a mortgage of $193,000:

Under the new rules, the borrower's upfront mortgage premium would increase to about $3,377 from $1,930, which most people would wrap into the total mortgage amount. So taken together, both the upfront and annual premium increases would translate to a higher monthly payment of about $25, or $1,291, according to calculations by Kevin Iverson, president of Reed Mortgage in Denver, using a 3.5% interest rate.

These will be the most expensive FHA premiums in history, says Bankrate. Premiums were last increased in April.

If your FICO score is 700 or better, you can avoid MIP and save about $44 a month (at 3.875% interest) through a traditional loan backed by Fannie Mae or Freddie Mac, the Times adds. (Estimate your credit score for free.)

The U.S. government -- through the FHA, Freddie and Fannie -- purchased or guaranteed 90% of all mortgages originated last year, down from 97% in 2010. The FHA insured 16% of mortgages in 2011, down from 19% the year before. Fannie and Freddie control an even larger share of the market.

More fees

You won't entirely escape fee hikes with a traditional loan, though. Starting April 1, Fannie Mae and Freddie Mac will dun lenders an extra 0.10 of a percentage point for bundling (securitizing) loans and turning them into investment products.

Estimates vary, but that will boost the cost of a mortgage loan or refinancing between $10 and $100 on each $100,000 borrowed, analysts say.

If you're thinking of acting fast to avoid the fee increases, you're probably too late. Lenders have started factoring them into rates already, experts say.

Thank Congress for this fee hike. It was passed in late December to cover the cost of a two-month payroll tax deduction. Fox News explains the move here.

… and more to come

The rising fees don't add up to much yet. But this is just the start. A trend is building, Guy D. Cecala, publisher of Inside Mortgage Finance, an industry magazine, tells The Wall Street Journal, "The message there for consumers is even though none of this stuff is going to have a big impact right away, the cost of getting government (backed) mortgages is going to go up." 

Yet another warning sign for borrowers was buried in recent headlines: The government wants to slowly start privatizing Fannie Mae and Freddie Mac, the giant, federally controlled mortgage corporations.

Government-supported​ mortgages attract buyers because they're cheaper. The Obama administration wants to start tipping the balance back to private-sector mortgages by keeping government-supported​ products available but with higher fees. The idea is to push borrowers into the arms of private lenders.

The Washington Post explains:

The Federal Housing Finance Agency, which oversees Fannie and Freddie, laid out steps to wind down the companies, largely by increasing fees charged to borrowers who take out mortgages. The FHFA's hope is that as the cost of receiving a taxpayer-backed mortgage goes up, more borrowers will turn to private lenders, whose loans do not carry government backing.

There's no timetable for this. It's just talk for now. But, as Cecala says, it's a sign of more to come.

More on MSN Money:

• Calculator:How much house can you afford?
• Finally, time to buy a house?
• Calculator:Should I refinance?
• Time to refi an adjustable-rate loan?
• No love for $26B mortgage settlement
• Calculator:Should you rent or buy?