The FHA have just announced they are going to increase buyers mortgage insurance “MI” payments AGAIN on all new loans after April 18th by .25%. This is now the 2nd increase in just the last 7 months, as they also hiked MI payments last October. This will mean another significant increase in a new buyers overall mortgage payment. For example it will increase payments over $86 a month on a loan amount of $417k, which is the same as spiking someone’s interest rate by .375%.  

 

 

Why is the FHA raising MI payments again in this market?

 

Last year the FHA announced its intention to raise its mortgage insurance premiums in a two-step process that was part of a larger program to put itself back on a firm financial footing. FHA’s reserve funds have been depleting and needed shoring up immediately to withstand future imminent defaults. As this chart below shows, the FHA loan loss reserves are being eaten up fast, so this new increase in MI is not that surprising. 

 

If you remember, it was only last year on August 12th 2010 that the FHA announced see here that they had passed a law where they can increase the monthly MI % up to a maximum of 1.55% (It’s currently at .90%) at anytime in the future if need be. As this is already the 2nd monthly MI increase since that announcement, I have no doubt the FHA will continue to increase this monthly MI % in the near future as they try to shore up their finances. Which means of course loans will only get more expensive for future buyers. 

 

 

What can a New Buyer expect to pay?   

 

Effective for new loans that have their FHA case # pulled (go into contract) on or after April 18th 2011, the FHA will increase the annual premiums collected on a monthly basis by .25%. For FHA traditional purchase and refinance products, the annual premium, shown in basis points below, is to be remitted on a monthly basis, and will be charged based on the initial loan-to-value ratio and length of the mortgage according to the following schedule:

 

Loan to Value                             Monthly MI %

= or <95% financing   increased from .85% to 1.10%

 

> 95% financing         increased from .90% to 1.15%

 

Let’s look at a loan example comparing someone buying before and after April 18th

Buying Before April 18th

 

Let’s say a buyer wants to buy a new home for $425k and is using a 3.5% down payment. They get an interest rate of 4.875% on a 30 year fixed loan. The monthly MI is .90% and the upfront funding fee is 1%. 

• Purchase price $425k
• 3.5% down payment is $14875
• Loan amount is $410,125
• Upfront FHA fee (UFMIP) is $4,101
• Total amount financed is $414,226
• MI factor at .90% = $310 monthly

 

Buying After April 18th  

• Purchase price $425k
• 3.5% down payment is $14,875
• Loan amount is $410,125
• Upfront FHA fee (UFMIP) is $4101
• Total amount financed is $414,226
• MI factor at .90% = $396 monthly=$86 higher

 

This new MI % increase from .90% to 1.15% represents an increase in the borrower’s payment of $86 a month. As borrowers have to keep the MI for a minimum of 5 years, over the next 5 years this MI increase alone will cost a buyer an additonal $5160 ($86 x 60 months). This monthly MI increase in payment is also the same as increasing a buyer’s interest rate by .375%. This is a significant amount of money for many families on a tight budget and may put a certain price range out of affordability for some buyers. 

  

The unintended consequences of this new MI increase

 

There are always unintended consequences by these new changes or rulings. Ultimately the FHA have good intentions, as they do need to shore up their reserves if they are bleeding money, but what will happen is that they are going to shrink the pool of qualified buyers too. Now there will be borrowers who will not be able to qualify for a loan because the extra MI payment will push their debt to income ratios over the required limit.   

Many first time home buyers already qualify for FHA loans with their debt to income ratios right at or just below the FHA maximum. This is another talking point to have with a buyer, to make sure this new increase in payment will not prevent them from qualifying for their desired purchase price anymore.   

Making sure buyers know how much their payment increases after April 18th  

 

 

 

It is very important that buyers understand the difference in their payments before and after April 18th and that there will be an overall increase in their monthly payment come April 18th! I am presenting all my buyers with a “before and after” April 18th scenario, so they can make an informed choice about their mortgage budget and buying plans. Because for example, an $86 a month increase in payment can mean a buyer can no longer afford a certain price range and now needs to look at different options. 

 

An update on interest rates

 

Mortgage rates have been continuing to rise and are now at 5%, remember they were just at 4% back in November! Now the question is where will they go from here? In their most recent rate forecast, MBA economists said they expect rates on 30 year fixed loans will climb to an average of 5.5% and higher by the 3rd quarter of 2011 and to an average of 6.1% during the final 3 months of 2012. 

 

But on a positive note, as you can see per this chart below, mortgage rates are still at historical lows when you compare them with interest rates over the past 40 years. For example, did you know that the average interest rate since 1970 is 9%. So for anyone looking at buying a home right now, they can still get a rate that is at 40 year lows.

 

 

Considering that this mortgage insurance increase is coming soon and that rates are continuing to rise, there is no doubt that now is a great time to buy for any people that are looking to get the most cost effective financing. If you have any questions regarding any of the inforamtion above, feel free to contact me directly at 858-200-9602. I look forward to chatting soon.

  

  

 

 

Tags: FHA Announces Another Increase in Buyers MI Payments on April 18th, FHA increase in MI, FHA MI increase, higher MI payments

This entry was posted on Tuesday, February 22nd, 2011 at 6:36 pm and is filed under FHA Announces Another Increase in Buyers MI Payments on April 18th. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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