FHA Changes Will Cost Borrowers More
Mortgage Insurance Premium to Increase
The 3.5% down payment on FHA loans could be more expensive for buyers than expected. Beginning April 1, 2013, the mortgage insurance premium will go up by .1% to 1.35%, which may not even be noticeable to most would-be homeowners.
New Policy Extends Duration of MIP
The staggering increase will occur on 6/3/2013, when FHA’s policy on the duration of the required mortgage insurance will be increased to the life of the mortgage. It effectively doubles the amount of total MIP if the loan is paid to term.
- Purchase Price: $175,000
- Down Payment: 3.5%
- Interest Rate: 4%
- Term: 30 years
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Currently, the MIP is required for approximately 9 years 9 months with normal amortization. The new program would require the MIP for the life of the loan. In this example, the initial monthly MIP is $196.88, which decreases based on amortization.
Will This Reduce Demand for FHA Loans?
There are still buyers who qualify for financing based upon income and credit who may not have the necessary additional down payment required for 80% and 90% conventional loans. The 3.5% FHA program has provided a great vehicle to get into a home with a minimum amount of cash.
For homeowners who expect to stay in their home for ten years or less, the new changes might not have much financial impact. Homeowners who expect to be in their home long term can refinance with a conventional loan without mortgage insurance, once the equity has increased due to amortization and appreciation.
For buyers to avoid these increases, they will need to act now to get the FHA commitment issued (case number) prior to these change dates.