FHA Lowering Mortgage Insurance Premiums on New Loans-Does It Make It Worthwhile?

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Obama officially announced today that the FHA would be lowering the mortgage insurance premiums(MIP) on newly issued FHA loans by 50 basis points from 1.35% to .85%. What does that mean? Well for the buyer of a $200,000 home, that means approximately $1,000 in saving!

Now for the bad news, FHA may still not be a great program for you. And the reason is this(taken from the White House Fact Sheet):

  • “Even after today’s reduction, FHA annual mortgage insurance premiums will be at 0.85 percent, above the historic norms of roughly 0.55 percent. Upfront premiums and the life-of-loan MIP structure will remain unchanged. “

The biggest issue for a homebuyer is that pesky part that states “Upfront Premiums and the life-of-loan mip structure will remain unchanged”.

The UPFRONT PREMIUM part means that a homebuyer is still paying 1.75% of the amount they are borrowing upfront, or in the example of buying the $200,000 house, the UPFRONT PREMIUM is a fee of almost $3,400 just to get the loan. The FHA loan will gladly add that amount to your mortgage so that you don’t need to come up with it upfront, but it’s still a cost you are paying.

The LIFE OF THE LOAN MIP structure means that you will be paying mortgage insurance premiums for the entire time you have the loan. That means whatever the original loan is, you multiple it my by the mortgage insurance premium rate, which is that number that Obama mentioned was reduced.

Example: $200,000 Home. 3.5% downpayment of $7000 and a loan of $193,000.

Mortgage Insurance Calculation assuming 3.5% down payment and loan of $193,000:

New mortgage insurance rate of .85% or in decimal form(.0085) x Loan of $193,000= $1640.50.

That $1640.50 gets divided into your 12 mortgage payments to equal an added payment of $136.71 to your mortgage payment every month.

Paying mortgage insurance isn’t the issue. The purpose of mortgage insurance is that a borrower putting down a small down payment is a riskier borrower. Less skin in the game makes it easier for the borrower to default when things get tough, so you pay insurance to help insure against that risk. Borrowers that put 20% down and do conventional financing are not paying mortgage insurance. The issue with FHA loans is that “life of the loan” part that was mentioned earlier. You see, on a conventional loan where the buyer puts down less than 20%, the buyer still pays an added mortgage insurance cost every month, but that premium disappears after the buyer has been paying their mortgage on time and when the loan is scheduled to reach 78% of the original loan amount borrowed. So for conventional borrowers, that payment disappears eventually. For FHA borrowers, that payment will live with you for the entire time you have that mortgage. If you stay in the home 30 years, you will be paying that extra insurance for a very long time. The only way to get out of it is to refinance into a conventional loan.  Rates being as low as they are right now, refinancing the loan(taking a new loan out to pay off the old loan) will most likely be at a higher interest rate than currently exists.

Does FHA make sense? For some people it still may. FHA loans are much more forgiving. This means you can have a lower credit score, or lower income, and still qualify to purchase a home priced where you wouldn’t be able to qualify for a normal, conventional loan. Your cost of housing may still be less than renting, and you are still paying down a mortgage slowly over time. If rates do stay low, and your credit improves, or income increases, then you may be able to refinance into a conventional loan in the future that might make more sense. If rates rise in the future, the cost of the mortgage insurance combined with today’s low interest rates, might still be cheaper than buying at a later point when rates are higher.

Much of this information summarizes how you are affected by taking an FHA loan. The calculations are estimates. I am a Chicago metro area Realtor, helping buyers find homes and sellers sell homes. To get a much better idea of what your costs would be and what types of loans may make the most sense for you, contact me and I can put you in touch with an area lender or mortgage broker who can talk to you in greater depth.”

Paul Cionczyk-Realtor at Coldwell Banker Residential 1420 Waukegan Rd Glenview,IL 60025

1. http://www.whitehouse.gov/the-press-office/2015/01/07/fact-sheet-making-homeownership-more-accessible-and-sustainable

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