By: Robert Harris Oregon Real Estate Attorney
Starting April 1, 2013, FHA loans could be more expensive
for buyers than expected. That’s when premiums will go up by .1% to 1.35% which
may not even be noticeable to most would-be homeowners.
But a second staggering increase will occur on 6/3/2013.
Currently on a normally amortized 30 year loan, Mortgage
Insurance Premium (MIP) is required on all FHA loans for approximately 9 years
9 months. Starting June 3, 2013, FHA would require the MIP for the life of the
loan. This will basically double the amount of total MIP if the loan is paid as
scheduled.
Here’s how this could effect the cost on an FHA loan or a
home purchased for $175,000 with a
standard 3.5% down payment at 4% mortgage rate on 30 year term
Current Law After
6/3/13
MIP duration Until
Balance is 78% of original loan Life
of mortgage
Cumulative premium $20,838.24 42,447.93
In this example, the initial monthly MIP is $196.88 which
decreases based on amortization.
There are buyers that qualify on income and credit who may
not have the necessary additional down payment required for 80% and 90%
conventional loans. The 3.5% FHA program has provided a great vehicle to get
into a home with a minimum amount of cash. So, those that save on the down payment, will, under the new FHA regulations, pay over time on their mortgage insurance premium.
For homeowners that expect to stay in their home for ten
years or less, the new changes might not have much financial impact. Homeowners
who expect to be in their home long term can refinance with a conventional loan
without mortgage insurance once the equity has increased due to amortization
and appreciation.
For buyers to avoid these increases, they will need to act
now to get the FHA commitment issued prior to these change dates. Or start saving up so you can get into a conventioinal home.
Why the change? It doesn't make a lot of sense from risk standpoint. You'd expect that as equity builds up, the risk of default would recede so there wouldn't be a need for mortgage insurance. So, it appears that the extra costs have less to do with risk and costs of doing business, and more to do with increasing profit, or paying off the losses, the FHA incurred because of their past reckless lending practices.