FHA just announced that effective September 7th, 2010, monthly mortgage insurance premiums (MIP) will increase from .55% to between .85% and .90%. To counter this change, they will reduced the upfront mortgage insurance from 2.25% of the loan to 1% of the loan.
The announcement also mentioned that these changes are required because the funds for FHA is getting depleted, and they say it makes more sense to fill it back up monthly than with up front fees.
Of course these numbers don’t mean much until we see real world examples. So the good news is that on a $100,000 loan, your initial fee of $2,250 is now reduced to $1000. Some will argue that since it was added to the loan anyway that it’s not as relevant, but that $2250 can cost you about $15/mo and you will have to pay it back when you sell. Now, your mortgage insurance premium will go up $19/mo due to the monthly increase. So you save $1250, but you pay $19 more monthly, and that is offset by $9/mo (difference from financning $1000 versus $2250). Ultimately, your mortgage goes up $10/mo on a $100,000 loan.
For $200,000, you go from $4500 to $2000 in up front premiums. Your MIP goes up $38/mo. It costs you $26/mo to finance that $4500, but only $12/mo to finance $2000. So your payments go up effectively $24/mo ($38-$26+$12) while you save $2500.
I know the news was scary when it first came out, as you can see, it’s not all that bad, right?
Well based on the figures, I think this ain’t pretty bad at all. I hope this encourages home buyers to purchase homes.
Seems like a wash with the decrease in upfront costs. Something had to be done if the funds are getting depleted and this is a good solution.
This is awesome information. I’ve noticed that many people are using the FHA program in Arizona. I wonder if fees and interest rates will continue as they are…..thanks
Hopefully it will allow homeowners to continue to increase due to less initial costs that most young people don’t have. Hopefully these young people will continue to keep their jobs.
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Yeah, your right! Sounds scary at first especially for those who are just planning to purchased a new home. But with that explanation that you had might change the minds of those in state of doubt home buyers and pursue buying one.
The decrease in the initial payment is good for home seekers but the monthly payment is really scary. Now the real estate market is up I fear this may kill the real estate market.
It sounds encouraging, actually. Thanks for breaking it down for us and letting us see the complete picture. Most people will balk at the initial idea of larger monthly payments. But once things are explained the way you did, they would probably start to calm down and see the benefits of these new terms.
Its not so bad but still doesn’t make a lot of sense. And you know this is just the start to see what they can get away with. This big companies will make up the lost income from forclosures by hurting those people who are paying. I think we may pull through this crisis only to have another one right behind it.
That’s great to know that initial deposit has been reduced but again monthly installments wont give relief.
It’s a shame that there is so much disinformation out there on this topic. When you drill down to the details it isn’t that bad. Thanks for pointing that out!
The upcoming predicted FHA change from 6% seller contribution allowance being reduced to only 3% is likely to be more of a headache, especially on the lowest end of the price spectrum. In many cases buyers will need to come up with several thousand dollars more at closing than they do now – that has more impact than $10 – $30 per month.