FHA changes mortgage insurance rates

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It has been about six months or so since FHA came out with updated guidelines, so they were long over due for one. The new rates on mortgage insurance haven’t been determined yet (either .85 or .90% of the loan amount per year), but that change is coming in October 2010.

In case you’ve missed some of the changes over the past year, you can catch up on those here (credit score requirements and seller contributions) and here (credit account requirement). If you read those posts, you will also remember that one of them dealt with the up front and monthly mortgage insurance premiums for FHA loans.

Well, rip up that section of the post because it is changing this October:

  • The up front mortgage insurance premium that is rolled into the loan will be reduced from 2.25% to 1.00% of the loan amount.
  • The monthly mortgage insurance premium will increase from 0.55% of the loan amount per year to either 0.85% or 0.90%.

If you are looking at those numbers, one looks good and the other doesn’t. One appears it was cut by more than half of its current amount while the other is almost doubled. That leads us to the important question – how does this affect someone looking to buy a home?

Fantastic question. The short answer – it will increase the total monthly payment for the borrower. Let’s look at some numbers to explain it.

Buying a home for $125,000 with an FHA loan before October 2010:

  • after your 3.5% down payment, the base loan amount is $120,625
  • the up front fee of 2.25% ($2,714) is put into the loan for a total loan amount of $123,339
  • the monthly mortgage insurance is $57, and at a rate of 4.500%, the total payment for principal, interest, and mortgage insurance is $682

Buying a home for $125,000 with an FHA loan in October 2010:

  • base loan amount is same as before, and the up front fee ($1,026) added in makes the total loan amount $121,831
  • the monthly mortgage insurance payment increases to $91, and at a rate of 4.500%, the total principal, interest, and mortgage insurance payment will be $708
  • that is about $25 more a month ($300 a year) for the borrower

How does that affect larger loan amounts? Under the same rate scenario for a purchase price of $300,000, the current total principal, interest, and mortgage insurance payment would be $1635 now and $1701 once October 2010 arrives. That is an increase of $66 per month or almost $800 a year.

In short, if you are looking to buy a home with an FHA mortgage and you’ve been sitting on the fence, now is a great time to hop off. Not only can you buy a home with a historically low interest rate, but you can also save a little more money if you act before the new FHA guidelines on mortgage insurance go into effect this fall. Looking to get started and the property is in the state of Georgia, you know how to find me!

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