On Feb. 22, 2023, the U.S. Department of Housing and Urban Development (HUD) made an important announcement that will benefit anybody seeking to finance (or refinance) their home through a Federal Housing Administration (FHA) loan.
The cost of the annual mortgage insurance premiums (MIP) has now been reduced from 85 basis points to 55 basis points for most homebuyers. That means an aggregate savings of around $678 million for American families just in 2023, and real money back in the pocket of individual homeowners each year. On a $100K loan, that equates to $25 / month in savings. The goal of this move is to further reduce the financial burdens of housing on borrowers, allowing more individuals and families to realize their dreams of homeownership.
Let’s delve into the details of the new mortgage insurance premiums and discuss how they can positively impact you and other prospective homebuyers. Additionally, we’ll explore the options available to get rid of MIP altogether – which saves you even more money in the long run.
What is FHA’s Mortgage Insurance Premium?
FHA loans are mortgages backed by the Federal Housing Administration, allowing borrowers to qualify for more favorable interest rates and lower down payments than conventional loans. The FHA is also a lot more flexible about a would-be borrower’s credit score than the typical lender, which is an increasingly important concern as the lending market continues to tighten due to general economic uncertainties.
However, to protect lenders against potential defaults on these mortgages, the Federal Housing Authority requires borrowers to pay these MIPs. This is true regardless of a buyer’s credit score or the amount of their downpayment, although the actual cost of the MIP varies according to the length of the mortgage you select, your loan amount and your loan-to-value ratio. The latter is determined by the dollar amount of the loan you want compared to the home’s actual worth, per appraisal.)
If you can afford to put down at least 10% of the home’s purchase price (or more), you can expect to pay mortgage insurance premiums every month for 11 years. Otherwise, you’ll pay MIPs for the life of your loan if your down payment is less than 10% of the total cost. That makes it a significant expense over time.
What’s the Real Effect of the Change on Homebuyers?
There’s an initial MIP that is generally part of your closing costs and a yearly MIP that is rolled into your monthly mortgage payment. The new change affects only the annual MIP, but that’s still good news for anybody who is about to finance or refinance their home through an FHA loan. This is especially relevant lately for consumers who have been battered by rising inflation on nearly everything. Now, everybody is trying to save money.
In practical terms, the FHA says that a borrower who has a mortgage of $467,700 (the national median price of a home as of December 2022) will realize savings of $1,400 in the first year. Borrowers with more modest loans in the range of $265,000 will save about $800 this year. Either way, when you calculate the savings over a decade or more, that’s a nice chunk of change that you can use for other things.
Can You Get Rid of Mortgage Insurance Premiums Altogether?
While the new lower mortgage insurance premiums offer immediate savings, many FHA borrowers are also interested in finding ways to eliminate their MIP altogether.
Exactly what you can do depends a lot on the origination date of your loan. Here’s the breakdown:
- For loans obtained between July 1991 and December 2000: Your mortgage insurance premiums do not automatically drop off at any point. You will pay MIP for the life of the mortgage.
- For loans obtained between January 2001 and June 3, 2013: Your mortgage insurance premiums will drop once your loan-to-value ratio reaches 78%.
- For loans obtained after June 3, 2013: With a minimum of 10% down, your MIP will drop off after 11 years. If your down payment was less than 10%, your mortgage insurance premiums continue for the life of the loan.
Given the rise in home values over the last few years, borrowers in the middle category may want to contact their lenders to see if they may now qualify for MIP removal. A new appraisal of the home may just be the trick to getting you over that 78% threshold.
If you fall in either of the other two categories, your only real option to remove the MIP earlier than expected is through refinancing through a conventional loan. This may only be advantageous, however, if you have built up 20% equity in your home and can avoid paying private mortgage insurance (PMI), have a good credit score, and won’t incur massive closing costs that would obliterate any potential savings.
What’s the Bottom Line?
Lower mortgage insurance premiums are always positive for borrowers seeking FHA loans. In practical terms, that can translate into more buying power for the average person and lower mortgage payments. If you’re a first-time homebuyer or struggling to pull together a larger down payment, that can ultimately broaden your options, making it more possible than ever to have the home of your dreams.
Regardless of where you’re at on your homeownership journey, consulting early with a mortgage professional about your options for a new loan or refinancing can make this process much easier. It can be difficult to understand all of the factors that go into a loan decision, so advanced knowledge and preparation are key to maximum savings.
