How new buyers can save big with lower FHA mortgage insurance
UPDATE:
The Department of Housing and Urban Development on Friday announced it has suspended the planned reduction of mortgage insurance premiums on Federal Housing Administration loans, effective immediately.
HUD's announcement reverses an earlier decision to reduce the MIP by 25 basis points. That planned reduction is no longer scheduled to take place.
Original story:
New homebuyers could save hundreds after the Federal Housing Administration this week decided to cut the premiums its borrowers pay on costly mortgage insurance.
The FHA plans to cut its annual mortgage insurance premium (MIP) by one quarter of a percent, or 25 basis points, on most new mortgages. That reduction could save FHA-insured homeowners an average $500 in 2017.
The cut would benefit homebuyers who close on their mortgages on or after Jan. 27, and also extends to borrowers who refinance their mortgages with FHA loans. The FHA last cut insurance premiums by 50 basis points two years ago after HUD routinely raised them in the years after the financial crisis.
This latest trim restores premiums to their pre-crisis levels.
The move comes just weeks after historically low interest rates began to climb upward, potentially making it more difficult for new buyers to enter the market, or current homeowners to refinance their existing mortgages.
Yet, the overall housing market continues to improve, with the total value of all homes in the U.S. reaching just over $29 trillion last year and regaining all the value lost during the Great Recession.
Last year also marked the fourth of consecutive growth for the Mutual Mortgage Insurance Fund, which insures FHA-backed mortgages on single-family homes.
"After four straight years of growth and with sufficient reserves on hand to meet future claims, it's time for FHA to pass along some modest savings to working families," U.S. Housing and Urban Development Secretary Julian Castro said in a statement.
The FHA is a branch of HUD, the Cabinet-level agency that regulates fair housing legislation and provides affordable housing options for millions of Americans. It doesn't lend money for homes but provides federal insurance for lenders that issue FHA loans.
"This is a fiscally responsible measure to price our mortgage insurance in a way that protects our insurance fund while preserving the dream of homeownership for credit-qualified borrowers," Castro added.
What is MIP?
MIP is one of the most nagging costs for FHA borrowers unable to put down a full 20 percent on their homes. Similar to private mortgage insurance, it safeguards lenders from loss should homeowners default on their loans.
Unlike PMI, MIP comes with an upfront premium that is 1.75 percent of the loan amount — so, $1,750 for a $100,000 loan. Borrowers must pay the initial premium before paying the annual cost, which is lumped with their monthly mortgage payment. MIP lasts the entire life of the loan and, also unlike PMI, cannot be removed once the equity in a borrower's home increases over time.
The FHA's decision to trim insurance costs only affects the annual premiums, meaning homeowners taking out FHA-insured mortgages this year will still pay the upfront cost.
How much is it?
The amount homeowners pay in MIP depends on the length of the loan term and their loan-to-value ratio, a metric lenders use to assess risk in approving borrowers for a loan.
For example, a borrower taking out a 30-year mortgage worth less than $625,500 (the financing cap on FHA-insured loans) may have an LTV above 95 percent, which most lenders consider high. The FHA requires that borrower to pay .85 percent MIP, or .85 percent of the loan balance. Under the FHA's change, that monthly payment would drop to .60 percent, possibly saving hundreds in costs this year.
What's so great about FHA?
FHA-insured loans are attractive because they accept lower down payments, credit scores and closing costs than many conventional loans offered by private lenders.
Lower insurance premiums is an added boon for hopeful homeowners who before may have felt priced out of the market thanks to the high cost of mortgage insurance.
"We have a real opportunity to get back on track," William Brown, president of the National Association of Realtors, said in a statement. "Every time we cut the cost of mortgage insurance, it means more borrowers meet the debt-to-income ratio required to purchase a home."
How can I benefit?
Movement offers FHA-backed loans that can help a first-time homebuyer land in the home of their dreams. We also offer FHA loans for homeowners looking to refinance their mortgages or renovate their homes. Get in touch with one of our loan officers for more information.
