December Payroll Tax Cut Deal to Raise Borrowing Costs in April

Right before Christmas, Congress and the White House agreed upon a two month extension of the payroll tax cut for all Americans that pay Social Security taxes.  That agreement keeps the percentage that working Americans pay into Social Security at 4.2% of their salary instead of the previous 6.2% of their salary. 

Unfortunately, some of the ways that Congress decided to pay for the $33 billion cost of this tax cut will likely make borrowing to purchase a home more expensive.  This is because Congress agreed to a 10% increase in the FHA Mortgage Insurance premiums beginning in April.  So those borrowers who cannot afford to put 20% on a home will have to pay higher mortgage insurance costs.  

In addition, Fannie Mae is raising the guaranty fee they are charging by 10% for all single-family mortgage loans delivered on or after April 1, 2012.  This will result in an annual charge equal to one tenth of one percent of a mortgage loan.  By example, an individual purchasing a home for $200,000 would pay an additional $200 a year for the entire lifespan of the loan.  

The bottom line for buyers is that borrowing costs will be going up shortly due to this government decision, which should give them motivation to buy before these changes take effect.