FHA Loan Costs Going Up, Up, Up

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.