Lower FHA mortgage insurance premiums (MIP) can encourage refinancing
By any standard, 2016 was one very good year for the FHA. It was so good that lower FHA mortgage insurance premiums are very much in play for 2017.
We are all talking about “FHA mortgages,” but in reality the FHA does not provide loans. According to HUDThe FHA is actually the “largest mortgage insurer in the world, having insured over 34 million properties since it was founded in 1934”.
How FHA Mortgage Insurance Works
When lenders provide loans that meet federal standards, borrowers get FHA backing – mortgage insurance. Therefore, you may be eligible to buy a home with as little as a 3.5 percent discount if yours FICO score higher than 579.
Why do lenders finance with so little down? Because with FHA insurance, the government will cover the lender’s losses if you don’t pay your loan.
Now we are suddenly talking about insurance and not mortgages, but wait and you will see how insurance costs can affect monthly mortgage payments.
In order for the FHA program to work, the government collects two types of insurance premiums.
Advance and annual premiums
First, there is an upfront mortgage insurance premium (the upfront MIP) that now equals 1.75 percent of the loan amount. This sounds like a huge amount, but the good news is you don’t have to take out that money.
IInstead, you can add it to the loan amount. Of course, a larger loan also means larger monthly payments.
Second, there is an annual mortgage insurance premium (the annual MIP). The premium for most borrowers is now 0.85 percent of the outstanding loan amount. To insure a $ 150,000 loan, you pay about $ 106 a month. This amount decreases each year as you pay off your loan balance.
The insurance premiums are collected to offset potential claims from lenders and the money is held in a reserve account known as the Mutual Mortgage Insurance Fund.
Congress says the FHA must have a cash reserve (the “capital ratio”) equal to at least two percent of its potential claims.
The good news from the FHA
It turns out people love the FHA program and the government has the numbers to prove it. More than 1.25 million FHA loans were issued in fiscal 2016, a period ending September 30.
In addition, the reserve fund now has a capital ratio of 2.32 percent. That is more than 16 percent more than the legally required 2.0 percent.
You can see what comes next. If reserves are piling up, why not cut FHA premiums, cut borrower costs, and fund more homes?
Will history repeat itself?
This is exactly what the FHA did in early 2015. It lowered the annual MIP from 1.35 percent to 0.85 percent. The result was nearly 330,000 additional loans.
So what about 2017? In a October press conference, HUD officials downplayed the possibility of premium reductions for the coming year. That may have been the end of the discussion.
From January 20, however, we will unexpectedly get a new batch of HUD officers.
The real estate industry definitely wants to see cuts in FHA premiums. William E. Brown, president of the National Association of Realtors (NAR), said: “FHA can continue to take responsible steps to manage their risk, even as they take action to make home ownership more affordable to lower-income buyers. and average income. ”
“More affordable” is of course the code for “We want lower FHA premiums.”
2 reasons for lower FHA mortgage premiums in 2017
In fact, there are two very strong reasons to suggest that FHA premium cuts may happen in the next year.
First, with a recovering housing market, the FHA is facing fewer claims. The higher premiums imposed to recover from massive losses from 2000 to 2009 are no longer necessary.
Second, the FHA program is flowing with money. It would be popular politically to cut insurance premiums. Home sales would be promoted and lower insurance costs would offset rising mortgage rates.
The goal of any new administration is to look better than the previous one. Lowering FHA fees would be widely seen as a bold and proactive move to pump up the housing market and help middle-income first-time buyers and borrowers.
As the old phrase goes, what’s not to like?
What are the current mortgage rates?
When you look at current mortgage rates, your mortgage insurance is also a factor if you’re less than 20 percent lower. Ask lenders for quotes including mortgage insurance if applicable to know. Also understand that your down payment and credit score will affect your mortgage insurance rate as well as your mortgage interest rate.