The Federal Housing Administration (FHA) insures loans to make them more affordable for Americans. But lately, banks that write the FHA-insured mortgages have added their own fees, making them more expensive and undercutting the whole notion of less costly FHA loans.

By offering to cover part of the potential risk to lenders by insuring home loans under special programs, the FHA enables more Americans to realize the American Dream. Typically, for a conventional loan not backed by the FHA, a buyer can expect to make a down payment of up to 20 percent or more. FHA loans, on the other hand, require as little as three percent down. You can also use competitive FHA loans to refinance a mortgage.

Emergency stimulus package

During the past few years, inflated real estate prices put many homes out of the reach of those people for whom the FHA program was created to help. But now, Congress recently approved emergency stimulus legislation that temporarily raises the ceiling on FHA loans from $362, 790 to $729,750 in the highest-cost areas.

For several years, buyers essentially ignored the perks of FHA loans because the agency requires above average credit. Rather than bother with those rules, buyers passed them over, opting instead for subprimes and other low-documentation mortgages tailored to those with mediocre or poor credit. But times have changed, and the demand for FHA loans is steadily growing because, as the mortgage industry struggles, many other types of loans have gotten prohibitively expensive or scarce.

Banks adding fees

When the higher limits were announced, buyers breathed a collective sigh of relief, and headed off to talk to their local bankers about FHA mortgages. Unfortunately, however, many came away empty-handed-or at least lighter in the wallet-because banks are adding their own prohibitive fees, charges, and restrictions on FHA loans.

J.P. Morgan's home-mortgage unit, for instance, recently imposed new so-called "price adjustments" on FHA loans that are written for the new larger amounts. The adjustments can tack on an extra half point of interest to each loan, which can negate the savings for borrowers.

By paying an extra half point during the life of a loan, a homeowner can pay tens of thousands of dollars in additional interest. But what hurts many buyers even more is that, in the near term, as gasoline prices, groceries, and other household items are becoming more expensive, their monthly mortgage payments will be higher. Add a half point of interest, and you automatically add an extra $100 or more to the monthly payment at a time when homeowners are already strapped for cash.

Congressional hopes dim

Other lenders are following the lead and imposing their own fees. Mortgage brokers around the nation report, for instance, that while smaller FHA loans are available for under six percent, the bigger new "jumbo" FHA loans cost about seven percent. As a result, say many brokers, they aren't selling as Congress had hoped, and the only thing that they're stimulating is consumer frustration.