FHA Mortgage Insurance Rate Drop
If you’re in the real estate industry, I’m sure you know that last week President Obama announced that the FHA home loan program is going to reduce their monthly mortgage insurance (MMI) premium by .50 (from 1.35% to .85%)
Well, here’s the rest of the FHA loan rate story:
When President Obama originally took office, the FHA monthly mortgage insurance rate was .55%. Then, up until last week, the Obama administration raised the FHA insurance rate five times to today’s high of 1.35%!
Many mortgage insiders felt that at at a 1.35% monthly rate ($337 a month on a $300,000 loan) the FHA had really gone overboard in what was really needed to replenish their reserve funds. Another San Diego lender stated that any potential San Diego home buyers who had even somewhat decent credit scores were more likely to choose a conventional loan vs an FHA loan as the monthly Mortgage Insurance cost was more favorable. Also, this San Diego home mortgage lender speculated that because of the large difference between the FHA and conventional insurance premium, it ended up actually drawing the riskiest borrowers and those with the lowest credit scores to the FHA program.
I understand that the half-point reduction in the FHA mortgage insurance will become effective on January 26, 2015. On that date, after the half a point reduction, the then current FHA mortgage insurance premium will be .85%. Also, this would put FHA loans on a much more competitive basis when compared with similar conventional loans.
I’ve been informed of a couple of other differences between the FHA insurance and the conventional mortgage insurance. I was told that on conventional mortgage insurance, after two years. If the homeowner can document that the loan to value ratio is 78% or less they can get the mortgage insurance dropped. Now, for FHA mortgage insurance, I’ve been informed that they cannot get it removed until it’s been in effect for 10 or 11 years! Also, if the homebuyer put less than 10% down for the FHA loan, they can never remove the mortgage insurance premium! Naturally, if rates are favorable, FHA buyers who went in with less than 10% may be in a position to refinance the property and thereby eliminate the mortgage insurance.
Once the half-point reduction in FHA loans goes into effect it can have a substantial effect on new FHA loans. To give you an idea, let’s use a loan amount of $300,000 and an interest rate of 4%. Today, the FHA mortgage insurance premium would be approximately $334.80 a month. Once the FHA reduction is in effect on the same loan, the FHA mortgage insurance premium would be approximately $210.80, or approximately $124 a month savings!
