Last week, the Federal Housing Administration (FHA) announced that it has reduced its annual mortgage insurance premiums (MIPs) by .25% for the majority of borrowers. This rate cut will apply to all FHA-backed mortgages that close on or after January 27 and, on average, is expected to save borrowers $500 throughout 2017.
Before we discuss why this is so beneficial for borrowers, let’s talk about how FHA mortgage insurance premiums work. Basically, whenever a mortgage lender issues a loan that meets federal standards, the borrower gets FHA backing, or mortgage insurance. This is what allows borrowers to purchase a house with a down payment of as low as 3.5% even if their credit is fair, because the government will ultimately cover any of the lender’s losses. To make the FHA program work, the government will collect two types of insurance premiums: upfront premiums and annual premiums. The upfront MIP, currently at 1.75% of the total loan, can either be paid at closing or added to the total loan amount for larger monthly payments. Annual premiums are now about .85% of the outstanding loan amount. Although these percentages are drastically different, both have shut out many potential homebuyers.
Now, with the FHA’s rate cut, not only will more potential homebuyers have the opportunity to afford a mortgage, but also current borrowers will more comfortably make each monthly mortgage payment. According to various industry experts, this cut is “much needed because it will help offset the impact of rising interest rates.” The timing is perfect, especially because last November, the FHA announced that its Mutual Mortgage Insurance Fund (MMIF) had climbed to a capital reserve ratio of 2.32%. This high cost of mortgage insurance prevented countless first-time homebuyers and lower-income borrowers from owning a home—but now, William Brown of the National Association of Realtors thinks “we have a real opportunity to get back on track.”
Alice Alvey, master CMB and Senior Vice President of mortgage outsourcing for Indecomm Global Services, strongly agrees with Brown’s statement. In an interview with MortgageOrb, she reported that this rate cut is a great beginning to 2017 from “both a market perspective and in looking at the stability of the MMI Fund.”
“The first time home buyer who doesn’t fit the government-sponsored enterprise [GSE] guidelines can leverage FHA, and at the same time, the lender will have 100 percent insurance coverage,” Alvey reported to MortgageOrb. “This is a win-win to open up this market to more borrowers. In addition, the actuarial report has shown that FHA delinquency, and foreclosure problems from the days of down payment assistance programs, are far behind them now. The loan quality has greatly improved with the underwriting changes over the last several years, and the industry can be confident that this change should not negatively impact the stability of the fund.”
With higher savings for borrowers starting January 27, it’s the perfect time to begin weighing your mortgage options. For more information about home financing, or to learn more about the housing market, contact one of our mortgage specialists today.
