FHA Loan MIP Changes

Guest: Joe Kelly

Guest: Joe Kelly

FHA loans can be great if you need a low down payment mortgage or if your credit isn't so hot. But they are going to get more expensive. Find out what's happening and what you need to do right now as I talk with Joe Kelly from ArcLoan.com. This episode aired live March 5, 2013.

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Big changes are in store for borrowers with Federal Housing Administration mortgages, as well as those who have been hoping to take advantage of the FHA program’s lower down payment options. FHA Commissioner Carol Galante has announced a series of changes to bolster the program’s financial health, but it will mean extra costs for most borrowers.

The main changes that will affect new borrowers — and some who refinance — are higher monthly mortgage insurance premiums that will now last for the life of the loan.

FHA mortgage programs are popular due to their more lenient down payment and qualifying guidelines. The major “trade-off” versus conventional mortgages lies in the area of mortgage insurance.

The mortgage insurance premium (MIP) is basically an extra charge that borrowers pay each month as insurance in case they default. MIP will increase for most new mortgages by 10 basis points. A basis point is 1/100th of a percent, which means a 10 basis point increase equals a rate increase of .10 percent. The rate for jumbo mortgages ($625,500+) will go up by 5 basis points or 0.05 percent.

That may not sound like a lot, but it is on top of a previous increase. In April 2012, the highest mortgage insurance premium on FHA mortgages rose to 125 basis points from 115 basis points, dramatically higher than the 55 basis points charged until October 2010. Now it will rise to 135 basis points.

Essentially this is like adding an extra 1.35 percent to the interest rate that borrowers using an FHA mortgage are required to pay, compared to someone who does not have to pay mortgage insurance.

For example: 135 basis points on a $200,000 mortgage is $225 per month. In a high-cost area like California, it would mean $562.50 added to the monthly cost of a $500,000 loan. See how much this increase can cost you here.

But where it really adds up is over the life of the loan, and that’s changing too.

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