Many people are aware of the FHA changes that took place in April, which again increased mortgage insurance premiums. However, you may not be aware of the more recent changes that went into effect on June 1, 2013. Following is a summary of the previous and new changes that will affect homebuyers utilizing the FHA loan program. If you are considering purchasing a home with an FHA loan, you may want to check what options are available under the conventional loan programs. For borrowers with solid credit and low debt-to-income ratios, the conventional program may result in lower mortgage insurance premiums and lower overall payments than FHA under the new guidelines.
For those unfamiliar with the FHA program, FHA requires both an “upfront mortgage insurance premium” and a “monthly insurance premium”. The current upfront mortgage insurance premium rate is 1.75% for all loans, regardless of the loan to value. This means that an additional 1.75% of the loan amount is added to the principal balance of the loan and paid over the amortization period of the loan (i.e. 30 years for a 30-year fixed-rate loan). In addition, a monthly mortgage insurance premium is paid each month as part of the mortgage payment. The recent changes affect that portion of the mortgage insurance as discussed below.
Prior to April 1, 2013, for loans with a down payment of less than 5%, the monthly premium was based on an annual rate of 1.25% of the loan amount. That percentage increased to 1.35% in April. To illustrate by calculation: For a $200,000 loan, the mortgage insurance premium would be $208. That is derived by multiplying the loan amount by 1.25%, which gives an annual premium of $2500, and then dividing by 12 to get the monthly amount. The new monthly amount at 1.35% would be $225. These percentages vary for loans over $625,000 and also for loans with a higher downpayment. They also do not apply to anyone refinancing an FHA mortgage that was originally taken out prior to May 2009, as there are separate rules that apply to those loans to allow homeowners the opportunity to refinance at much lower mortgage insurance rates that were in effect at the time of the original loan.
The other significant changes that just went into effect in June related to the time that the monthly insurance premiums must be paid. Previously, for loans with less than 5 percent down, the monthly mortgage insurance was required for a minimum of 5 years and would be canceled once the loan balance was reduced to 78% of the original balance. The change now requires that mortgage insurance premiums will be paid for the life of the loan!
These changes also significantly affect loans with terms of 15 years or less. Previously, there was NO monthly mortgage insurance premium for loans with an original loan to value of 78% or less and terms of 15 years or less. There is not only a mortgage insurance premium of .45%, but it will remain on the loan for 11 years. Loans with a loan to value between 78% and 90% will also have a premium of .45% (vs .35 prior to April 1, 2013) and be required for 11 years, Previously, this category was canceled at 78% loan to value. Loans with a 15-year term and loan to value over 90% will also carry the premium for the life of the loan.
We specialize in conventional home mortgages, FHA, VA, and USDA mortgage options, refinance loans, and reverse mortgages. We’ve worked extensively with cash-out refinancing, and help clients to lower their monthly mortgage payments.