I received a letter from the federal department of Housing and Urban Development (HUD) informing me that there are going to be sweeping changes to the FHA mortgage insurance program starting next month. This is something that has been talked about for some time but nothing had been finalized. The major change is in FHA’s Up Front and annual mortgage insurance premiums, the Up Front premium is being reduced my more than 50% (from 2.25% to 1%!) and the annual premium is being increased from 5.0% or 5.5% (depending on loan-to-value ratio) to .85% or .9%. But what is FHA mortgage insurance and what does this mean?
I was once told that FHA IS MORTGAGE INSURANCE. FHA is the government’s program that allows more Americans to own homes. They have both purchase and refinance programs designed to allow those with less of a down payment (equity for refiance customers) and/or lower credit scores than the conventional mortgage market will allow. To keep the program safe and tax payers off the hook for FHA losses, HUD employs a mortgage insurance premium to keep the program viable. EVERY FHA LOAN HAS MORTGAGE INSURANCE (MI). This MI premium keeps the program solvent, allowing for the program to continue and more people to become homeowners.
Recently, with the decline of conventional financial availability, FHA’s market-share has grown. So much so that they needed to make a change to keep the program running well. These changes will make a negligible difference to homeowners payments but will keep the program up and running for the long term. Up until these changes took place the UFMIP premium for an FHA loan was 2.25% of the loan amount. Although this amount is not required to be paid by the homeowner at closing it is financed into the loan, making the loan amount thousands of dollars higher than it otherwise would be and increasing the monthly payment accordingly. The annual MIP was .55% (or .50% with at least 5% down payment) but that is not being raised to .90% (or .85% with at least 5% down payment). This, of course, is going to increase monthly payments.
What does this mean? Well, not much in the beginning. Those obtaining FHA financing will have smaller loans, a good thing, but their monthly payment will be increasing but about the cost of a trip for two to the movies (without popcorn, candy, and drinks!). Not a bad price to pay to keep these programs viable and starting out with a smaller loan. But that still seems like a negative on the surface. Higher monthly payments, no matter how small the increase may be, is a negative.
However that is not looking at things in the long term. One thing to remember is, FHA’s mortgage insurance is only required to be in place for 5 years, or when the mortgage balance reaches 78% of the original purchase price, whichever comes last. Anyone that keeps their home long enough to realize the deletion of the annual MIP will see huge savings over today’s situation. To keep it simple, their monthly mortgage payment without the MIP will be less from day one because they are only financing the Up Front MIP of 1% of the loan amount, not a whopping 2.25% as they are today, so their loan amount is smaller. That principal and interest payment is the same for the life of the loan and when that MIP premium they are paying for the first 5 years falls off, their payment will be reduced drastically.
In the short term this change will not mean much to people; loan amounts will be a little smaller, the overall payment will be a tad higher, and this valuable program will stay in effect for more Americans to utilize to become homeowners or refinance to today’s incredibly low rates. Those that keep their homes/loans for 5, 10, 15, 20+ years will realize huge savings in the later years. Seems like a win-win to me.
Your Local Expert,