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Why Mortgage Costs Could Swell In 2017

By Motley Fool Staff - Mar 7, 2017 at 7:01AM

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Mortgage rates have been on the rise since late 2016. Here’s why costs could increase further.

One of President Trump's early executive orders increased costs for Federal Housing Administration mortgages -- causing FHA mortgage applications to drop 13%. 

Homeowners looking to refinance to land a lower mortgage rate should take note, as there are several factors at play that could lead to higher mortgage rates as Trump's administration progresses. Motley Fool analysts, Gaby Lapera and Nathan Hamilton discuss what they see  moving mortgage rates in 2017.

A full transcript follows the video.

This podcast was recorded on Feb. 27, 2017.

Gaby Lapera: Let's talk a little bit about this executive order, and the FHA loan mortgage insurance. First of all, what is the FHA?

Nathan Hamilton: Yeah, we'll get a little bit into the details here. Mortgage 201/101, is kind of where we'll balance it.

An FHA loan is essentially a loan for borrowers that may not be able to put down 20% like a bank would require. FHA comes into the market and tries to make it cost efficient and cost effective for higher-risk home buyers. So, you can put down as little as 3.5% with an FHA loan. And what the Trump Administration did -- it may have been on day one or two of the presidency of the administration -- is, reverse an Obama-era order that decreased the mortgage insurance rate premium. When Trump came in, he essentially flipped it and raised the mortgage insurance premium by 0.25%. If you look at what it actually means in dollars, it's roughly about $30 per year. That's what the difference would be for the average homeowner. So it's not a huge change, but it definitely does signal something that the administration may be looking into in the future when they do have direct influences. Getting the government somewhat outside of the mortgage market, because if you look at it, the government is involved with the FHA...

Lapera: FHA stands for Federal Housing Administration.

Hamilton: Yep, Federal Housing Administration, Fannie Mae and Freddie Mac and so forth, other mortgage players, they are there to make the market somewhat more efficient. There is a taxpayer cost for those. In 2008, taxpayers had to bail out Fannie Mae and Freddie Mac by tens of billions of dollars, and they're still repaying those loans.

Lapera: Actually, fun fact, they have repaid their loans. It's really interesting, because they're still in conservatorship, technically...

Hamilton: So, they take all the profits, still?

Lapera: Yeah, the government is still taking all the profits, and shareholders are actually suing and saying, "It's time to let that go." I think they have repaid it. They've surpassed it by a lot, in the millions of dollars that they've superseded the amount that they borrowed in the first place. So, we'll see what happens with that, maybe we'll do another episode on it.

Hamilton: But, like I said, if you look at the administration, they have called for a reduction in big government, and those are possible ways that that could be affected. If you look at it in a very simple, plain-vanilla way, if they are making the market more efficient and they're removed from the market, it could increase costs for borrowers, whether that comes in the way of higher origination fees, mortgage rates, and so forth. But really, I would say, if you look at the grand scheme, big picture, the Fed probably has more of an impact in the near-term.

Lapera: Yeah. And you might be wondering, if you're a listener, why the federal government would be invested in people buying homes at all. Why would they want that to happen? Historically, people who buy homes in an area, that helps increase the prosperity of that area, because people who own homes are going to require a lot of services that employ people in the area. It's part of this traditional idea of the American Dream that everyone can own their own home. So, I think part of it is emotional and symbolic, and part of it is hard economics. Owning a house really does help the area that you're in.

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