Payroll Tax Cut Increases Mortgage Costs

Most people were happy to hear that Congress passed the payroll tax cut extension, extending the tax break for two more months.  But Congress still has a budget to meet, and if taxes are reduced in one place, costs have to increase somewhere else.

So where did they get the money to fund the payroll tax cut?  The answer is simple — mortgages.  Effective April 1, 2012, Fannie Mae and Freddie Mac will raise the guarantee fees charged to lenders.  The new fees will be in effect until October 21, 2021.   How much will the fees increase?  It’s difficult to say how much the fees will go up on any given loan, but overall the increase should average out to about .1% (that is, one-tenth of a percentage point). 

That may not seem like a whole lot on a monthly basis, but your lender will pass this extra cost on to you.  And when you add up the extra money you will pay over the life of your loan, it will add up to quite a bit.  Of course, when they start collecting these fees from ALL mortgages, well, they will make up what income they lost as a result of the two-month payroll tax cut extension.

So the two month payroll tax cut extension translated into a nine and a half year mortgage cost increase.  A little delayed gratification can sometimes go a long way.