FHA INCREASES THE MONTHLY INSURANCE PREMIUM EFFECTIVE OCTOBER 4, 2010.
What is the effect of the FHA monthly insurance premium increase on the borrower?
Let's take a look: FHA has become a go to loan for so many borrowers, but particularly is used for first time buyers frequently. In the past it has made sense for these buyers because the up front mortgage insurance premium (MIP) collected at closing reduced the monthly payment for those borrowers putting down the minimum required amount.
A lot of borrowers look at the monthly payment for good reason - they KNOW what they can afford. If they finance a monthly premium that lowers that payment, it satisfies their needs.
By the same token, they need to be shown the alternative of putting down a little more and reducing the monthly payment by (a) financing less and (b) lowering mortgage insurance premium.
FHA HAS AN UP FRONT MORTGAGE INSURANCE PREMIUM AND A MONTHLY INSURANCE PREMIUM.
FHA has made a few changes over the last year or so; increasing the up front collection of mortgage insurance from 1.5% to 2.25% for instance. Now they are changing gears and reducing the up front MIP to 1%.
On the other hand, FHA is increasing their monthly MIP to 90 bps (from 50bps) for those loans with a loan to value of 95% or more. (85bps for 30 Yr loans less than 95%) What is the effect of these two changes?
It has always been important to evaluate the borrower and the programs available. This change in up front MIP makes it even more important to do so. Sure beginning in October if you are paying up front MIP on $100,000 you will finance $1500 less than prior to October; but at the same time, your monthly payment would INCREASE so that over a ten year period, you would actually pay more than double that amount in premiums.
If a borrower has 5% to put down it may be wise to look at that option. Evaluate the savings if a borrower puts down 5% and does a conventional loan vs a 3.5% down FHA loan. There are many reasons to use a FHA loan, a lower monthly payment may no longer be one of them.
As a consumer, talk to a lender who will discuss your options, and as always, know what you can afford and what you want to spend BEFORE writing a contract to purchse a home. As a Realtor, ascertain what is in the best interest of the buyer before writing the contract.
Dora Ann Griffin
D A Griffin Financial, LLC
NMLS 6380
