Payroll Tax Holiday Creates Additional Cost For New Mortgages

If you weren’t paying attention to events in our nation’s capitol regarding the payroll tax over the Christmas holiday, it would be understandable. At that time of year, we rightly turn our focus toward our family, friends, reflection and rest. In the other Washington, there was a fair amount of reflection, but little rest between rivals. 

President Obama and the House Republicans debated, negotiated and then extended the Payroll Tax Holiday for an additional two months through February. The focal point of the debate was on its duration and how the measure would be financed. The extension that ultimately passed the congress and was signed by the president directed that part of the extension would be paid for by increasing guarantee fees that Fannie Mae, Freddie Mac (agencies) and FHA charge mortgage lenders. Initial calculations show that the additional guarantee fee on a Fannie Mae loan would equate to an additional .125% (one eighth of a percent) in a new loan’s effective rate, or about $240 per year on a $300,000 loan. As of the date this article was written, there is no word from the FHA on detail, but it is likely that the annual insurance premium will rise this spring from 1.15% to 1.25%, amounting to an increase of $300 per year.

The payroll tax holiday extension carries benefits measurable in weeks at a cost of $265 billion, appearing short-sighted when compared to what is expected to be a 10-12 year impact on mortgage guarantee and insurance fees. Here’s why: the money that the 2 month payroll saves employees equates to 40 basis points on 10 or more years worth of Fannie, Freddie and FHA mortgages, or a total of $8 billion. The additional fees are passed directly on to borrowers immediately when they take out new mortgage loans. Traditionally, the marketplace gradually builds in these adjustments to agency price increases over a few weeks. However, after the legislation was passed, two large mortgage lending firms raised their rates by approximately .125% the next business day. The remaining lenders adjusted their pricing over the course of days without any official word.

The increase in monthly payments is marginal for new borrowers and it is unlikely that a difference will be noticeable. Protest from the real estate industry has been minimal. However, on some scale, it does illustrate Washington’s disposition toward short-sighted deals for political purposes, over reforms that gravitate toward the federal government’s fiscal soundness. And while passing measures that are not fully paid for is not new in Washington, it remains troubling.

If you have a mortgage in place, new fees are not applied to your current loan and you will not see any change. Higher insurance and guarantee fees go into effect only on new mortgage applications since the beginning of the 2012 calendar year. Depending on loan amounts, borrowers should evaluate the financial benefit of refinancing a loan on an individual basis, not on any lone cost. The same is true if you are buying; home purchases are best weighed in consideration of your housing needs and long-term financial goals. A mortgage lending professional can provide tools and insight on how to evaluate these.