FHA loans have grown substantially over the past decade, primarily because of the benefits that these loans offer to families with low to modest budgets. The perks to choosing an FHA loan, one that is backed by the Federal Housing Administration, are plentiful and include lower down payments, more forgiveness toward poor credit and the acceptance of gift funds and financial assistance. Yet there is always a price to pay, and the biggest drawback to FHA loans is the mortgage insurance premium (MIP) that borrowers must pay each month.
The Federal Housing Administration recently announced that it will be raising its MIP schedule for FHA-insured borrowers – again – for the fifth time in seven years. Not everyone will be affected, which is why it’s important to be aware of which side you fall on. Starting April 1, 2013, some borrowers will pay as much as 1.55% for annual FHA insurance and will owe this amount for the life of their loan.
Understanding the New FHA MIP Schedule
FHA-insured borrowers pay their mortgage in two parts: the upfront mortgage insurance (UFMIP) and the annual mortgage insurance premium (MIP). The UFMIP is a one-time payment that is rolled in at closing and is financed into loan unless you choose to pay in cash.
With the new schedule, those who took out their FHA loan prior to June 1, 2009 can use the FHA Streamline Refinance Program that will prevent them from paying the higher MIP rates. Additionally, the annual MIP schedule for older loans is also low:
- 15-year fixed rate mortgage with loan-to-value of 78% or less: No annual MIP
- 15-year fixed rate mortgage with loan-to-value greater than 78%: 0.55% annual MIP
- 30-year fixed rate mortgage, all loan-to-value: 0.55% annual MIP
No More MIP Cancellations
Another factor to be aware of is that MIP cancellations will no longer be allowed. Traditionally, the FHA would cancel MIP for homeowners who paid the mortgage insurance for at least five years on a 30-year mortgage and whose loan balance was less than 78% of the home’s appraised value. Many homeowners have been unable to take advantage of this cancellation anyhow since they have negative equity in their homes. Starting in June 2013, the FHA will remove annual MIP for homeowners who have been paying their mortgages for 11 years and whose loan-to-value is 90% or less. Everyone else will pay MIP for the duration of their loan.
For those who have an FHA loan or are looking to get an FHA loan, the new MIP schedule poses some new things to think about. While FHA loans certainly have many benefits, the fact that it continues to raise its mortgage insurance is making these once budget-friendly loans more expensive. Even with all the changes in effect, it’s never too late to inquire about what can be done about your loan, and FHA loans overall are still a great option!
Contact Stephanie Weeks to learn more about your options for FHA loans, refinancing and streamlining programs.