What the NEW “Payroll Tax Holiday” May Cost Buyers In Interest Rates.

payroll tax cut, holiday, mortgage rates

During the holidays, you probably read or heard about the debate regarding the two month “Payroll Holiday” otherwise known as, the Temporary Payroll Tax Cut Continuation Act of 2011. If so, you know that it was passed by the Congress and quickly signed by the President. To pay for this two month benefit, which will continue through Feb 2012, a significant change will quickly impact all Conventional Conforming loans and all FHA loans in the near future.

Let’s start with Conforming products. It has been determined that something known as a Guaranty Fee that all lenders pay to the Government Sponsored Entities (GSEs) will increase by 10 bps in yield (A unit that is equal to 1/100th of 1%). Effectively, that means all Conforming loans will increase almost .125% in rate. The GSEs are requiring this increase for loans delivered to them beginning in the second quarter of 2012. For us, it means we need to add this to our pricing soon …very soon. You will see the increase effective on Wednesday, Jan. 11, 2012.

So what does all this mean to you? Well, after the change is made, not too much. It is … what it is. We will go on pricing loans with base rates that will be slightly higher than would have been available otherwise. Customers who have not yet locked their loans need to quickly make an important decision. That is a decision the customer needs to make because the rates can vary from day-to-day. If you’re looking to purchase a home in the Tampa Bay area you can find out how much you can qualify for here!

Now, let’s move to FHA. There will be a similar 10 BPS increase in yield to FHA programs, as well. But it will be handled via the Mortgage Insurance Premium (MIP). So we should expect changes in Upfront MIP, monthly MIP or both. We do not have the information as to timing from FHA as yet.

Interesting fact: I want to point out that it will require 10 years of the increase in rates (as noted above) to pay for the two months of benefits provided by this “Payroll Holiday.”

What are your thoughts on the Tax Cut Extension?