FHA Mortgage Insurance Premiums Set to Rise PDF Print E-mail
Friday, 01 February 2013 11:22

Yesterday, the Department of Housing and Urban Development announced that effective April 1st, loan applicants for FHA mortgages will be facing higher mortgage insurance premium rates (MIP) on new loans issued, as well as longer durations for how long they may be paying those premiums.

To refresh on two topics, mortgage insurance is an additional monthly expense associated with your mortgage, usually coming into play when a homeowner puts less than 20% down; an FHA loan is a special loan program which allows for putting as little as 3.5% down in order to purchase a home.  When conventional loans carry mortgage insurance (known as PMI when it relates to such loans), typically the borrower is able to remove the expense entirely once their equity in the home crosses the 20% threshold.  Under the old/current FHA MIP rules, most borrowers - those taking advantage of higher loan-to-value ratios over 30 year loan terms - would be able to remove the mortgage insurance expense after holding the loan for a minimum of five years and reaching 22% equity in their home.  With the upcoming change in rules, however, these same borrowers would be committed to paying MIP for the entire life of the loan.

In addition, the amount they pay will be increased slightly also.  Last year, the MIP rate for loans with loan-to-value ratios over 95% increased to 1.25% - this year they will be creeping up another ten basis points to 1.35%.  Using last years FHA loan example, this would mean that monthly MIP expenses for a loan on a $500,000 home purchased for 3.5% down home would be going from ~$503 per month, to ~$543 per month.  Recall that upfront FHA mortgage premiums increased last year as well.

At the end of the day the FHA loan program remains a great vehicle for qualified buyers who are looking to purchase a home for little money down.  Increasingly though, my advice would be to explore low-percentage down conventional loans, which can offer as little as 5% down, and in some cases, 100% financing.  Interest rates themselves will tend to be slightly higher right now with conventional loans vs FHA, but with those spreads narrowing and the ancillary costs of FHA loans continuing to increase, it is worth cross-shopping what lenders can offer you.  The possible exception in certain circumstances might be the purchase of condos that are FHA approved, where conventional financing might prove prohibitive and/or difficult to obtain with low down payments.

The full HUD document pertaining to the upcoming FHA MIP changes is viewable here.

Last Updated on Saturday, 23 February 2013 14:58
 

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