Well, our government is changing the fee structure for FHA loans effective this October. In my humble opinion, this is in response to money they have been losing on defaulting FHA loans over the past few years. They are touting it as a way to save homeowners money in the long run, but that remains to be seen.I hope it does!
Here’s the skinny of what’s changing:
- Upfront Mortgage Insurance will be reduced from 2.25% to 1%
When you get an FHA loan, there is an upfront mortgage insurance premium that the borrower doesn’t pay out of pocket, but it is added to the total loan amount. Currently, it is 2.25% of the loan amount. By reducing it to 1%, borrowers will have LESS Mortgage Insurance added to their loan amount, hence, they will borrow less money
- Monthly Mortgage Insurance increased from .55% to .85 – .95 % depending on the Loan to Value
If only the above happened, borrowers would surely save money. However, when you have an FHA loan, the borrower pays monthly mortgage insurance equal to .55% of the loan amount until they have paid down to 80% loan to value. Now, that monthly Mortgage Insurance (MI) will be much higher…going to .85-.95%. That means their monthly payment will be higher.
- So What Does This Mean For You?
If you buy a home and get an FHA loan, it will cost you LESS upfront and your loan will be less than before. However, your monthly payment will be slightly higher. Therefore, whether or not you save money depends on how long you own your home and keep your loan, interest rate, and other factors. I personally believe it will cost a borrower more money in the long run to get an FHA loan. However, to know exactly and by how much, a custom amortization scenario needs to be done and calculated for the specific purchase.
These are just the highlights. I am not a loan expert but I have some great lending partners that I work with who are local experts. If you have specific questions please give me a shout and I can answer them or get you in touch with someone who can! Mike