FHA Refinance and Purchase Loans To Become More Expensive?

June 16th, 2010

In the last year, FHA mortgage insurance rates have risen to cover losses incurred by defaults on FHA mortgages. Last week a bill allowing additional increases to FHA mortgage insurance easily passed in the House of Representatives. The bill should also easily pass the Senate, and be signed into law by the President.

So what does this mean to you? Higher FHA insurance rates mean slightly higher monthly payments on FHA mortgages. It also means that you need to consider the higher mortgage insurance premium when using a free mortgage calculator to determine an estimated monthly payment or mortgage amount.

FHA Mortgage Insurance Premiums

1. Upfront FHA Insurance Premium

FHA mortgages have two different premiums that borrowers pay. At time of funding, a premium called the Upfront Mortgage Insurance Premium (UMIP, or MIP), equal to 2.25% of the loan amount, is added to the loan balance. Thus, if your FHA loan is for $200,000, your mortgage balance will be $205,500. This premium is the same for FHA purchase or refinance mortgages.

2. Monthly FHA Insurance Premium

In addition to the UMIP, FHA charges a Monthly Mortgage Insurance premium (MMI) until your loan balance falls below 80% of the value of the home.

The current legislation is set to increase the MMI charged to all new FHA borrowers from 0.55% to 1.50% of the loan amount, almost triple the current rate; it will not affect the UMIP added at closing to the loan balance. Thus, for a $200,000 loan, the current MMI payment per month is $91.67, but under the new rate of 1.50%, that monthly payment increases to $250 per month–an increase of $1,900 per year.

Why Increase FHA Mortgage Insurance Premiums Now?

The Department of Housing and Urban Development (HUD) has recently been under pressure from Congress to reduce loan losses and rebuild its capital reserves for the FHA mortgage program.

In the past two years, the UMIP has increased from 1.5% to 1.75% to the current 2.25% in May 2010 as part of HUD’s efforts to increase those reserves. The tripling of the monthly premium on top of a 50% increase in the UMIP in the past few years is meant to strengthen the FHA program financially–to ensure that the housing market is not damaged further due to increased FHA loan defaults.

However, this MMI increase will impact borrowers’ ability to qualify for FHA mortgages. By tripling the MMI, prospective borrowers will be able to afford less mortgage principal and interest payment, and thus less house. Further changes being considered include raising the minimum credit score limits required at the maximum loan amount of 96.5% loan-to-value, and/or simply lowering the maximum loan amount to 95%.

Calculate Your Higher FHA Premium Payment

Use a free mortgage payment calculator to estimate the loan amount or monthly payment for an FHA refinance or purchase as follows. Keep in mind the 2.25% premium when inputting the loan amount; multiply your anticipated loan amount by 1.0225 (for example, $200,000 x 1.0225 = $205,500) to obtain your actual loan amount.

Then you add 0.55% to the currently available mortgage rate. For instance, if the current FHA rate is 4.50%, input 5.05% (4.50% + 0.55%) for your calculations. However, when the new mortgage insurance premiums go into effect some time later this year, perhaps as early as this summer, you will instead need to add 1.50% to the 4.50% rate (6.00%) for your calculations.

When using a free mortgage affordability calculator, add 0.55% (or, after the legislation is enacted, 1.50%) to the mortgage interest rate you are inputting, to get an accurate payment for a FHA mortgage.

Why Use FHA?

With the double premiums for mortgage insurance and the rising cost of FHA mortgage insurance, why should you use FHA for your purchase or refinance mortgage? Mainly because of the low equity required for FHA mortgages. If you have less than 5% for a down payment to purchase your new home, or want to consolidate your debt or refinance up to 96.5% of your home’s value, FHA is the mortgage for you.

But hurry–because your monthly payment will go up considerably if you do not start your new FHA mortgage before the new mortgage insurance premiums go into effect.

Posted By :
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

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