Looking to refinance or buy a home using an FHA loan? June 3 is a deadline you may want to mark on your calendar. After June 3, homeowners with an FHA loan can no longer cancel their mortgage insurance premiums once the outstanding principle balance of the loan reaches 78% of the original balance. This was traditionally a major savings for owners as the loan continued.
Loans where the starting loan balance is higher than 90% of its appraised value will require that the owner pay the premiums for the life of the loan. If the loan to ratio value starts at 90% or less then the borrower must pay mortgage insurance premium payments for 11 years even if the loan drops under 78% of the original balance.
The FHA raised the annual mortgage insurance premium on most loans that have a case number starting with April 1. On most FHA loans, the premium will increase by 0.10 percentage point or $100 per year for each $100,000 in loan amount. For jumbo loans greater than $625,000 with a term longer than 15 years, the increase will be 0.05 percentage point or $50 per year for each $100,000 loan amount. Writing about the changes, Best Rate Home Loans showed the impact of this using a hypothetical Florida FHA borrower. That borrower is paying a $50 MIP per month on a 30-year loan. If that person gets an FHA case number before June 3, 2013, it might take them 281 months to reach that 78 percent mark where their monthly MIP could then be dropped. If that person did not get a case number prior to June 3, they might have to pay an MIP for all 360 months of a 30-year loan, or 79 months more than if they had acted before June 3. Over the life of the loan that $50 a month becomes $3,950. These increases don’t apply if a borrower refinances an existing FHA loan endorsed on or before May 31, 2009.
The changes come as FHA loans have been heating up. Interest rates have been low and lenders have funded $233 billion in mortgages, a 22% increase from the previous year. The FHA is making the decision because their reserves are running low. It is experiencing the after effects of bad loans made during the housing crisis and has reserves in the red. These moves are deemed necessary to rebuild the Mutual Mortgage Insurance Fund.
Some are wondering if an FHA loan is still a good option. Traditionally these loans have allowed buyers with a lower income and credit score to get in the game. They also have lower interest rates and require a lower down payment but as the new rules kick in, that lower down payment could cost you more in the long run. If you have a strong credit score and are able to put down a large down payment, conventional loans may offer competitive rates and more options. It’s important to connect with a mortgage broker who can review how these new rules affect your individual case.
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