Changes in FHA premiums not good news for borrowers

I’ve always considered FHA loans great for people who are responsible with their money and who want to make the jump from renting to a modest home they can afford.  Unfortunately, FHA loans were almost entirely abandoned in the early and mid-2000’s when the subprime bubble was occuring. 

Recently, Matt Carter of Inman News reported on another not-so-consumer-friendly change to FHA loans.  Last April, FHA raised the upfront mortgage insurance premium from 1.75% (of the total amount of the loan) to 2.25%.  Monies collected from this premium are pooled into a fund to pay lenders in case the borrower defaults on the loan. 

Along with the up front premium, the borrower must pay a monthly mortgage insurance at a .55% yearly rate.  

Good news/bad news.   The good news is that Congress recently passed a law rolling back the up front premium (which usually gets rolled into the loan) to 1%.  The bad news is that the yearly rate for the monthly MI is going up to 1.55%.  What was supposed to be a break for borrowers at closing will now be a heavier burden on a monthly basis.  

Here’s an example……you purchase a property for $300,000.  If you put 3.5% down, your initial loan amount would be $289,500.  Roll in your up front MI premium at 2.25% and your new loan total would be $296,014.  If you had an interest rate of 4.75% on the 30-year fixed, with your current rate of monthly MI, your payment would be $1680 (minus taxes and insurance).  Under the new rates, your loan amount would be $292,395 (based on a 1% up front MI premium being rolled into your loan).  Your total payment with the monthly MI at a yearly rate of 1.55% would be $1,903, a $223 difference in the monthly payment. 

Now, come again on how this is going to help the borrower??

Originally this was supposed to take effect on September 7, but has been rolled back to October 4.  Stay tuned.

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