Effective April 1st…funny April Fool’s joke….NOT! FHA announced this past Monday that the cost of government-insured mortgages will increase slightly for some new homebuyers. The rise in up-front fees on mortgages was deemed necessary to build up dwindling capital.
FHA is increasing what is known as the Upfront Mortgage Insurance Premium “Upfront MIP” from 1.00% of the loan amount to 1.75% of the loan amount. This fee is added directly to the total loan along with the monthly mortgage insurance premium.
So, on a $200,000 loan amount, based on today’s rate of 1.00%, you would pay $2,000 in MIP; with the new increase of 1.75% you would be paying $3,500 to the loan amount; an increase of $1500. Then you add in a monthly mortgage insurance premium of 1.1% per thousand which costs $183 per month.
Although the FHA’s acting commissioner, Carole Galante, states this will raise the average homeowners payment by only $5 per month, FHA consumers are already paying about $183 more a month than those consumers that don’t pay any mortgage insurance. Such programs as the Masshousing Loan that allows a 3% down payment with no mortgage insurance can save homeowners thousands of dollars over the course of the term of the mortgage.
The FHA fees which were just raised in the last year affected current FHA holders by preventing them from refinancing to lower rates. The increased fees have become so high; it did not make sense for many homeowners to drop their rate a full percent. This latest move will result in much higher costs to buyers. A mortgage rate of 4.00% will be a net rate of 5.400% when you factor in the mortgage insurance. This is a difference in $170 per month higher payment for FHA clients compared to those who may obtain the Masshousing Loan with No Mortgage Insurance
Several economists when interviewed in regards to this latest increase agreed this would have a negative impact on the already struggling housing market. First time home buyers represent a large percentage of the market and with these additional costs it will discourage many new buyers from entering the housing market in areas that need it most.
The FHA program was designed to be a very affordable alternative for those with a low down payment and credit that was considered less than perfect. The FHA mortgage is still a very good option for those with credit scores under 680, but new alternatives are becoming available every day and consumers should look at all their options.
When shopping for a mortgage, make sure your lender offers Masshousing, FHA, USDA, Fannie Mae and Freddie Mac, this will allow to compare all the programs available to ensure you are getting the best possible option and the most cost effective mortgage.
Please contact me with any questions you may have regarding this article: bill@billnickerson.com
The Mortgage Markets 