The FHA mortgage insurance increase and what it means
The FHA, in November, announced it was boosting its annual mortgage insurance premium by a quarter of a percent in April, which represents the third increase in 12 months. Specifically, the annual premium will be 1.1 percent to 1.15 percent for 30 year loans and 0.25 to 0.50 percent for 15 year loans. The up-front, one-time insurance premium of 1 percent will remain unchanged.
What does that mean for homeowners? In essence, that quarter of a percent increase means an annual increase of $250 per $100,000 borrowed – a little less than $21 added to monthly mortgage payments. Which insurance rate applies? That all depends on the loan-to-value ratio, a measure of the amount borrowed to pay for a home compared to how much the house is worth. A loan-to-value ratio lower than 90 percent on a 15-year mortgage nets the premium rate of .25 percent per year, while a ratio higher than that means the .50 percent rate applies. On a 30-year mortgage a loan-to-value ratio lower than 95 percent requires the 1.1 percent rate while a higher ratio calls for the 1.15 percent annual premium.
How does that all work? Let’s say someone is buying a home here in scenic Arkansas and they take out an FHA loan. The buyer puts down 3.5 percent as a down payment – the minimum required by FHA – and borrows $150,000. The buyer also comes up with the 1 percent one-time mortgage insurance premium payment which can be financed into the loan balance.
Since the loan-to-value ratio is more than 95 percent, the buyer is looking at the annual mortgage insurance premium of 1.15 percent, which tacks on an additional $1,725 a year – or $143.75 per month – to the mortgage payment.
Why has the FHA raised its premiums so much over the past year? The official line from the FHA is that the program needs money. The FHA plays a larger role in the housing market than it did about five years ago due to the death of the subprime mortgage market and some stricter lending requirements. There are plenty of would-be homeowners out there who can swing a monthly mortgage payment, but coming up with a down payment is an issue.
The FHA helps those individuals purchase homes and the program has underwritten a lot of mortgages, indeed. However, that growth hHome Sweet Home is written by Ethan C. Nobles and is distributed weekly to newspapers throughout the Natural State on behalf of the Mortgage Bankers Association of Arkansas.as taxed the FHA’s reserves and, under federal law, the program must keep a certain amount of money in reserve. While the program appears to be well capitalized, it’s worth mentioning that the low reserves were a major concern last year and it’s no surprise that FHA officials don’t want to return to those days.
Bear in mind that mortgage insurance is nothing new. Private lenders generally require a buyer to purchase private mortgage insurance when a borrower finances more than 80 percent of a home’s value. In other words, unless you’re in a position to make a 20 percent down payment when purchasing a home, just count on paying mortgage insurance.
The FHA, then, is a great option for millions of buyers in the nation. To find out more about FHA loans, conventional mortgages or anything else related to financing a home, seek out a local mortgage banker and start asking questions.
Benton resident. Rogue journalist. Recovering attorney. Email = Ethan@FirstArkansasNews.net.