The Department of Housing and Urban Development (HUD) together with the Federal Housing Association (FHA) has made an announcement that will dramatically change the mortgage insurance premiums (MIP) that will be charged to a buyer with an FHA mortgage. According to a statement from the White House it is estimated that this change will save homebuyers approximately $800 per year. The savings comes from reducing the basis points used to calculate monthly mortgage insurance premiums on FHA Loans by 30. The rate was formerly calculated at .85% and it will now be calculated at .55%. It is anticipated that this change will lower housing costs for 850,000 people in 2023.
How Much Will I Save?
The reduction of 30 bps will result in a savings that varies based on the amount of the home loan. For example, a homebuyer with a $200,000 loan will save $600 per year. A $300,000 loan will save $900 per year, $400k will save $1,200 per year and a $500k loan will save $1,500. This supports the overall goal to make homeownership possible for more people. Reducing the mortgage insurance premium lowers the monthly mortgage obligation and improves the debt to income ratio of the buyer, thus allowing them to utilize these savings to increase the home they can afford to buy in todays competitive market.
What is Mortgage Insurance (MIP)
Mortgage insurance is required on home loans when the borrower is unable to put down a 20% down payment. The insurance is there to protect the lender in the event that the borrower were to default on their loan.
Mortgage insurance is calculated differently based on the type of mortgage loan you obtain. Conventional loans are the most common loan type and typically the loan of choice for well qualified buyers. Mortgage insurance is required on any conventional loan where the buyer does not have a 20% down payment and when the loan-to-value ratio reaches 20% the mortgage insurance will be removed from the loan.
In contrast FHA loans handle mortgage insurance much differently. FHA loans in general are government backed loans that are best fit for those with limited down payments and/or credit challenges.
You can get an FHA loan with as little as 3.5% down however according to FHA MIP guidelines you will then be paying mortgage insurance for the life of the loan.
If you are able to put 10% down on an FHA home loan you would be required to pay mortgage insurance for 11 years.
According to an article in Forbes there are many industry advocates who are calling HUD and FHA to do away with the life of the loan mortgage requirements. It is unclear if further changes will be made. The reduction of 30 bps (basis percentage points) takes the monthly mortgage calculation on FHA homes from .85% to .55%. This change will save 850,000 people approximately $800 a year on their mortgage. The goal of this decision highlighted by the Biden administration is to work towards making homeownership more attainable for all Americans.
What If I Currently Pay Mortgage Insurance?
The changes announced to FHA loans will go into effect for new loans only. This means that if you currently have an FHA loan that you pay mortgage insurance on, nothing will change with your monthly payment.
The good news is that the change is in place and it may be valuable for you to consider refinancing to a conventional loan program or an FHA loan program with these new guidelines in effect.
If you have an existing FHA loan with mortgage insurance that you may want to refinance or if you’re just starting your home buying journey, you need a team of local real estate experts on your side. Our team is well versed in a variety of loan programs including fixed mortgages, ARMs, VA loans, FHA and more! We have the privilege of partnering with the best local agents, appraisers and attorneys the Upper Valley has to offer. When you work with Legacy Mortgage you are working with the best local professionals from beginning to end. Reach out to the Legacy Mortgage team to get the loan process started. Call us today, 603-643-7400.