Monday, August 9, 2010

FHA Mortgage Insurance Is Going Up!

In a press release dated August 5, 2010, FHA Commissioner David Stevens announced that effective September 7, 2010, FHA intends to lower the up-front mortgage insurance premium from 2.25% to 1.00%.

At the same time, FHA will increase the monthly mortgage insurance premium from .55% to .90% for loans with less than 5% down, and to .85% for loans with 5% or more down.

Of course, everyone will go bananas when they hear this, so let's see what it really means before declaring that HUD is killing the real estate industry. Let's look at two examples of how the changes will affect the industry.

In our first example, we will assume the purchase price is $100,000, the down payment is the minimum 3.5%, and the interest rate is 5%. We will also assume that the borrower will finance the up-front mortgage insurance premium (because they almost always do).

Under the current mortgage insurance rules, the monthly payment for principal, interest, and mortgage insurance would be $573.62. Under the new rules, the principal, interest, and mortgage insurance would be $595.10.

That's an increase of $21.48.

In our second example, let's assume a purchase price of $200,000, a down payment of 3.5%, and an interest rate of 5%. Again, we will assume that the borrower will finance the up-front mortgage insurance premium.

Under the current mortgage insurance rules, the monthly payment for principal, interest, and mortgage insurance would be $1147.24. Under the new rules, the principal, interest, and mortgage insurance would be $1190.21.

That's an increase of $42.97.

Will either of those increases kill many deals? Probably not. Will they help to ensure that FHA will be able to continue its role of providing very stable, very low interest rate mortgages to borrowers who otherwise might not qualify for a loan? Absolutely.

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