FHA insurance rates to change increasing payments
August 09th, 2010On Friday August 6th the bill HR 5981 cleared the House of Representatives and headed to President Obama’s desk for signature. When signed into law HR 5981 will grant greater powers to the Federal Housing Administration to increase mortgage insurance rates to borrowers. The changes will impact monthly payments and numbers you input for the monthly mortgage payment calculator.
Why the increase?
When a lender funds an FHA mortgage it is not getting a guarantee from the Federal Housing Administration, but rather mortgage insurance protection from FHA to assist in covering losses from defaults and foreclosures. The insurance is paid for by borrowers who pay two separate FHA mortgage insurance premiums, an upfront fee added to the loan balance paid into the FHA pool when your mortgage funds and a mortgage premium you pay monthly.
After coming through the national housing and mortgage crisis, FHA found itself very low in insurance reserves, termed capitalization. Although well below the limits established by Congress, FHA has increased both the upfront and monthly mortgage insurance premiums in the past year. The changes were not enough, however, and the new bill passed by Congress will allow FHA Commissioner David H. Stevens the flexibility to further increase the mortgage insurance premiums as he sees fit to restore the necessary capitalization to the insurance program for FHA mortgages.
How much?
In a letter to lenders Friday, Commissioner Stevens laid out his plan for changes in both the upfront and monthly mortgage insurance rates in effect for FHA case numbers obtained on or after September 7, 2010. (When an new FHA application is taken the originator must obtain a case number for the file — that is the point of origination for FHA purposes).
The upfront mortgage insurance premium will decrease 100 basis points, going from 2.25 percent down to 1.25 percent of the base mortgage amount. Currently on a $200,000 FHA mortgage the upfront MIP added to your mortgage is $4,500; under the new policy effective September 7th the premium would go to $2500.
While the upfront MIP is declining, the monthly premium is increasing. Currently the premium of 0.55 percent will increase to 0.90 percent for mortgages with a loan to value greater than 95 percent and to 0.85 percent for mortgages with loan to values at 95 percent or lower. Obviously FHA is providing a little sweetener to encourage you to put more down for an FHA mortgage. The change for a minimum down, 3.5-percent FHA mortgage at $200,000 would increase your monthly mortgage insurance premium from $92 per month under the current rate to $150 per month under the new rate.
Running the numbers
In July we provided instructions on how to calculate mortgage insurance premiums for FHA mortgages. For your calculations using mortgage calculators the way to calculate the new premiums has not changed, but the numbers you will input have changed depending on your loan-to-value.
The net impact on a $200,000 FHA mortgage between the reduction in the upfront mortgage insurance premium being added to your mortgage and the monthly mortgage insurance premium for a 30-year fixed FHA mortgage at 4.25 percent is an increase of $48 per month.
Despite the changes to the mortgage insurance premiums that could cause a net increase to your monthly mortgage payment, the low mortgage rates and down payment requirements for FHA mortgages still make them an attractive program for refinancing or purchasing a new home.
Using either a refinance calculator to determine your monthly mortgage savings or a pre-qualification calculator to discover your purchasing power using FHA financing, keep in mind the mortgage insurance changes that go into effect next month.
Dennis C. Smith is co-owner and broker of record for Stratis Financial in southern California. He has over twenty years' experience in the mortgage industry.
