For the first time since 2001, the Federal Housing Administration (FHA) is reducing its mortgage insurance premiums (MIP).
Current U.S. homeowners and future homebuyers will be eligible for the changes coming toward the end of January 2015. These changes will save U.S. homeowners millions of dollars.
To promote homeownership, in 1934 the federal government established the Federal Housing Administration (FHA). FHA does not lend money to borrowers. FHA is an insurance program.
ABOUT FHA MORTGAGE INSURANCE PREMIUMS
All FHA borrowers are required to pay mortgage insurance. The insurance paid helps cover potential losses incurred by lenders if borrowers default on payments.
The mortgage insurance paid by the borrower goes into a fund. Lenders are paid by the fund if the loan defaults. With a solid third party guarantee backing the loan, lenders are willing to offer loans with down payments as low as 3.5%.
FHA mortgage insurance is divided into two parts.
Upfront Mortgage Insurance Premiums (UFMIP) is paid at the time of closing and is equal to 1.75% of the loan amount. Assuming a $100,000 loan amount, a premium of $1,750 is required from the borrower.
The UFMIP can be financed into the loan. Adding the UFMIP to the loan doesn’t count against a borrower’s loan-to-value (LTV) ratio. As such, most homeowners opt to finance the upfront insurance premium by adding it to their loan amount.
The second type of FHA insurance is the annual premium. Annual mortgage insurance premiums vary according to the terms of the loan, the amount borrowed and the loan-to-value ratio.
Annual mortgage insurance premiums are paid in 12 monthly installments each year. The payments are included in a borrower’s escrow payment, typically on top of principle, interest, taxes and homeowners insurance.
FHA TO REDUCE MORTGAGE INSURANCE PREMIUMS
As of January 26, 2015, for the first time in 14 years FHA is reducing its annual mortgage insurance premiums. The Upfront Mortgage Insurance Premium (UFMIP) for all FHA loans will remain unchanged at 1.75%.
The reduced annual mortgage insurance premiums will apply to all 30-year term loans. The reduced insurance rates will not apply to borrowers with 15-year mortgage terms. The mortgage insurance rates for 15-year FHA loans will remain the same, ranging from .45% to .95% of the loan balance.
For 30-year mortgages with less than 5% down payment, the majority of FHA-insured loans, the annual mortgage insurance premium will be reduced from 1.35% to .85%. For FHA-insured loans with 5% down payment or more, the premium will be reduced from 1.30% to .80%.
Borrowers with FHA case numbers issued on or before January 26, 2015 will be eligible for the new insurance premium rates. However, for borrowers already in the process of getting an FHA loan, lenders will be allowed to cancel case numbers before January 26th.
This insurance change can be significant for borrowers who currently have an FHA loan. The expectation is that roughly 800,000 FHA borrowers will take advantage of these lower mortgage insurance premiums in 2015. Furthermore, the savings are expected to encourage 250,000 first-time buyers to enter the purchase market.
HOW MUCH CAN YOU SAVE WITH THE LOWER FHA MIP?
Under the new insurance premiums, assuming a loan amount of $200,000, borrowers will save $83 per month. If you’re in a one of FHA’s high-cost area such as California, Washington D.C. and New York, you could save as mush as $260 per month.
Not only will refinancers potentially save a lot of money, homebuyers can now afford more home. Alternatively, the home that a borrower is considering to purchase just became more affordable.
The calculation for monthly mortgage insurance payments is: loan amount multiplied by insurance rate divided by twelve. For example, if the loan amount is $200,000 and you’re putting down 3.5%, the calculation would be $200,000 x .85 percent / 12 = $141.67.
Savings After Reduced FHA Mortgage Insurance Premiums on a 30-year loan
FHA loans are available with down payments as low as 3.5%. With FHA dropping their mortgage insurance premiums, along with today’s FHA mortgage rates being at their lowest levels in years, using FHA financing to buy or refinance a home has never been more cost effective for millions of U.S. homeowners.