SAN FRANCISCO — The Department of Housing and Urban Development is reducing the premiums it charges to insure its mortgages, a move that could save borrowers up to $1 billion a year and spur growth for mortgage lenders that rely heavily on FHA loans.

HUD Secretary Andrew Cuomo said Monday that the agency will reduce its up-front premium by 75 basis points, or one-third of the current 225-basis-point annual premium, when homeowners have built up 22% equity in their home. It also plans to pay premium refunds to current borrowers. The changes, part of the Homebuyer Savings Plan, are to be implemented Jan. 1. The plan is modeled after private mortgage insurance legislation passed by Congress in 1998. Unlike that legislation, the department said, this program will continue to insure the mortgages after the annual premium payments are eliminated.

The initiative could boost the already record U.S. homeownership rate — 67.7% in the third quarter, HUD reported last week — and also give a big lift to mortgage lenders that rely heavily on FHA loans.

John A. Courson, president and chief executive officer of Central Pacific Mortgage in Folsom, Calif., said, “Obviously, we’re very excited” about the program. “It’s dramatic.”

Mr. Courson said FHA loans make up almost 50% of his company’s loans and estimated that the changes could mean up to $1,700 in savings for his customers.

Tom Jacob, chairman and CEO with Chase Manhattan Mortgage Corp., said: “It’s going to get a lot more people in new homes, especially at the lower end of the economic ladder.

“This is probably one the best initiatives by HUD to get more minorities … into homes than any program in several years.” Mr. Cuomo said HUD will conduct a $10 million advertising campaign for the program.

“We need to get the word out to say that now is the time to buy a home,” he said.

HUD insured a record 1.3 million home loans last year, for a total of $125 billion in mortgage lines of credit. HUD-backed loans target low- and moderate-income families, with special emphasis on minority households and underserved communities.

The plan also provides for current FHA borrowers to receive a refund on premium paid when they sell their home or refinance their loan.

Refunds from the FHA surplus, which has been growing in recent years thanks to the booming demand for housing, will be available for roughly 200,000 borrowers in the program’s first year. The surplus has not returned premiums to homeowners since 1990.

Andrew D. Woodward, chairman of Bank of America Mortgage and incoming president of the Mortgage Bankers Association, said the insurance premium savings “will enable lenders to help more working families narrow the gap between their take-home pay and their mortgage payment.”

Dow Jones contributed to this article.

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