On January 9, 2015, the Federal Housing Administration (FHA) officially announced that annual Mortgage Insurance Premium (MIP) rates will soon be reduced for FHA loans with terms greater than 15 years. See the chart below for the affect on future mortgage payments, which could help boost the housing market.
MIP Rate Reduced
Currently, FHA loans with a loan-to-value ratio greater than 95% require that the borrower pay monthly mortgage insurance based on an annual rate of 1.35%. Effective with FHA case numbers ordered on or after January 26, 2015, that rate will be reduced to .85%.
For example, an FHA loan of $150,000 currently has a monthly mortgage insurance premium of $168.75. (($150,000 x 1.35%)/12). With the reduction to .85%, the monthly payment will be reduced to $106.25, a savings of $62.50 monthly.
Rising MIP Rates Previously Made FHA Loans Less Attractive
Over the last 4 years, mortgage insurance premiums have consistently increased from .55% in 2010 to the current rate of 1.35% which went into effect in April 2013. This significant increase over the years has made the FHA program a less attractive and less affordable program for many home buyers. In addition to the increasing monthly MIP rates, changes to the rules requiring how long borrowers had to continue to pay those premiums also went into effect in 2013. Under those rules, many borrowers became obligated to pay those premiums over the 30-year life of the loan.
As a result, for borrowers with higher credit scores and low debt to income ratios, it has typically been more advantageous to finance with a conventional Fannie Mae or Freddie Mac loan with private mortgage insurance. Fannie Mae also recently announced a reduction in the required down payment from 5% to 3%, making the conventional loan even more attractive to first-time homebuyers.
Now, FHA Loans More Attractive with Lower MIP
With the new reduced mortgage insurance premiums many borrowers who could not qualify for an FHA loan because of the high mortgage insurance premiums, but didn’t qualify for a conventional loan because of more stringent credit scores and debt to income ratios, may now take a second look at the FHA loan program.
While the new rates are not effective until January 26, 2015, FHA has announced that they will temporarily approve case number cancellation requests for loans in the process that have already had case numbers assigned, but have not yet closed. This will allow borrowers whose loan is in the process to take advantage of the new lower mortgage insurance premium rates.
New Annual MIP Rates Amortization Term, Loan Amount, Loan-To-Value Ratio
The following table shows the existing and new annual MIP rates amortization term, base loan amount, and the loan-to-value ratio.
TERM 30 YEARS
Base Loan≤625,500≤625,500
>625,500
>625,500
LTV≤95%>95%
≤95%
>95%
Previous1.30%1.35%
1.50%
1.55%
Current.80%.85%
1.00%
1.05%
TERM 15 YEARS
Base Loan≤625,500≤625,500
>625,500
>625,500
LTV≤95%>95%
≤95%
>95%
Previous.45%.70%
.70%
.95%
Current.45%.70%
.70%
.95%
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