Obama’s 2012 Payroll Tax Cut and How It Affects Your Mortgage Rates

Obama’s extension of the 2011’s payroll tax cut should come as welcome relief to the millions of working and unemployed Americans struggling through these difficult times. The $143 billion measure passed with overwhelming bipartisan support in congress earlier this month. The payroll tax cut extension continues the 2 percent reduction in the tax that funds Social Security, cutting it from 6.2 to 4.2 percent for employees. Other provisions in the payroll tax cut include maintaining the current level of reimbursement for doctors treating Medicare patients and extending jobless benefits to the unemployed.

What does this mean in the real world? A worker earning $50,000 a year, for example, will take home an extra $80 a month – higher paid employees could save as much as $2,200 a year from the 2 percent deduction. Benefits for the long-term unemployed average about $300 a week and should last, depending on the State, anywhere from 63 to 73 weeks.

All told, the 2 percent reduction in the Social Security payroll tax deducted from workers’ paychecks is going to cost the Federal government $93 billion through 2022. Additionally, the cost of extending jobless benefits for 63-73 weeks comes out to $30 billion, half of which will be paid by auctioning off portions of the communications spectrum to wireless companies and the other half by increasing federal workers pension contributions from 0.8 percent to 2.3 percent.

A big bone of contention among some homebuyers is a measure that was snuck in to the payroll tax cut bill allowing HUD (Department of Housing and Urban Development) to increase insurance premiums on FHA (Federal Housing Administration) backed loans. This measure will permanently increases the fee government-backed mortgage giants, Fannie Mae and Freddie Mac, charge to insure home mortgages by one-tenth of a percentage point, or 0.1%.

Basically what this translates to is a $17 monthly house payment increase for a $200,000 mortgage from Freddie or Fannie. Keep in mind that this increase will only affect people who want to refinance or apply for new loans from Freddie Mac or Fannie Mae from Jan. 1 2012 onwards.

Any rumors of increasing mortgage rates to pay for the 2012 payroll tax cuts extensions are greatly exaggerated. Here are the facts:

– The hike only affects FHA backed loans (i.e. Freddie Mac or Fannie Mae).
– Only new FHA loans that have been applied for from Jan. 1 2012 onwards are affected.
– The increase in insurance premiums for FHA loans will go up by 0.1% – which will be an average increase of $17 a month for a typical Fannie or Freddie mortgage holder.

If you are worried about these new FHA insurance hikes affecting your mortgage or are looking to refinance your home loan for better a better rate, do not hesitate to contact me or Carlos at Team Aguilar today!

14 thoughts on “Obama’s 2012 Payroll Tax Cut and How It Affects Your Mortgage Rates”

  1. At a time when Social Security Payouts exceed what is coming in, reducing contributions and funding it with a fee tacked on Government sponsored home loans is robbing Peter to Pay Paul.

    That (Only) $17 a month for a $200K loan translates to about $6,120 over 30 years… Much better utilized if the mortgagor took that $17 and applied it to paying down their mortgage instead of funding something that has nothing to do with real estate…. or is even going to help real estate.

    Does somebody making $50,000 a year really need an extra $80 a month at a cost to the U.S. Taxpayers of $93 Billion?

    I don’t think so…

    1. Is it robbing Peter to pay Paul, or is it the federal government adjusting the budget to increase revenue in one place to make up for a shortfall elsewhere – something the government does all the time. That $80 a month does make a significant difference to, say, a family of 5 living on $50,000 a year – that’s why this payroll tax cut has such overwhelming support among most Americans.

      Look at it this way, if the mortgagor is one of those families struggling with their mortgage payments and earning around $50,000 a year, they can pay that extra $17 from the extra $80 they will be bringing home each month thanks to the payroll tax cut.

      If they’re on a higher tax bracket, then I don’t think they should have trouble paying the extra $17 a month.

  2. That’s the whole point. They’re counting on people spending the extra $80 – that’s why these things are called stimuluses. They want people to spend more to boost demand which in turn boosts production and stimulates the economy.

    When you give tax breaks to rich people they just save the money or reinvest it in the stock market, which is great for Wall Street, but not so good for small local businesses trying to stay afloat. That money goes straight back to the banks or, in many cases, offshore – this does not help the domestic economy one bit.

    When lower income people get a chance to bring home a little extra they immediately spend it, because they always have bills that need paying or some immediate expense that cannot be put off. Poor Americans spending money in America is better for the economy than millionaires sending that cash abroad to the Cayman Islands.

  3. When wealthy people get tax breaks, they do invest their money in property or the stock market, but it isn’t good for businesses that sell consumer durables and non-durables. These kinds of purchases impact the manufacturing sector of the economy and are very important to fuel recovery

  4. San Diego Homes for Sale

    What I don’t get it is, if our gov actually cares about the middle and lower class about spending, then why don’t they just stop forcing us to pay them an income tax? With that much money in our pockets, we will spend like crazy which is what economists want.

  5. That somehow a good news for employees but it is still a bit small to save since the economy is terribly bad. Thanks for bringing this up.

  6. RPM Bakersfield

    Interesting post and we’ll pass this information along to our Bakersfield investment property clients. There’s never a dull moment in politics is there? =)

  7. FHA premiums keep going up. You’re almost better off going with a conforming loan now if you have the 5% down and can qualify. It’s amazing that the government keeps hiking up FHA’s premiums in a time that many buyer’s were choosing FHA loans. Now, I think we’ll see more home buyers saving for the extra 1.5% down and going with a conventional real estate loan.

  8. You brought up some interesting facts Alex. Clearly the government is making an economists move to increase revenue by building stimuluses. The more extra money in our pockets, the higher tendency for us to spend/invest. I feel sorry for those with mortgages under Fannie & Freddie. With today’s economy, people are already having a hard time paying their mortgage debts, more so with the $17 increase. Thanks for sharing these information!

  9. Very informative post if only the UK government would follow suit that would be music to the ears of many UK citizens still very much feeling the squeeze. Generally the UK tends to follow prictices set in place by our counterparts in the US so it could quite easily become a reality. However the one thing holding this back would be the fact that there are massive deficits in the UK with government spending that have yet to be fully rectified so they are still trying to generate as much income through tax as they can.

  10. Thanks for the breakdown. I typically don’t like government programs that cost taxpayers billions of dollars, but this seems like it could benefit the economy and will help struggling families. The increased insurance premiums are acceptable, the GSEs are already over leveraged, so they could use the extra money…just in case.

  11. Yes, that $80 will go back into the economy, provbiding a stimulus.

    Paul, $50K a yar is barely making a living in many areas. If you have to feed a family of four, pay car and health insurance, and your mortgage, these is precious litltle left over. If you life in South Dakota or Nebraska, where you can buy a new home for $125K, $50k is a good living. In Seattle, So Cal, San Fran, or NY, not so much.

  12. My problem regarding taking out house insurance policy these days is the price. Our current economic climate means we need to think about any recurring monthly payments!

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