On January 26, 2015, the Federal Housing Administration (FHA) reduced mortgage insurance premiums (MIP) from the current annual rate of 1.35% down 0.50% to a rate of 0.85%. This is a huge incentive for prospective home buyers who may be using an FHA loan as their mortgage. For the average borrower, this reduction will save nearly $80 a month. To qualify for this special rate, the FHA loan must have a term of 15 years or longer, which almost all borrowers already choose to do anyways.
Some financial analysts and other economic pundits criticized the move, complaining that loosening the barriers to entry could spur another real estate boom and bust. FHA officials counter that they have fully evaluated the situation and that this reduction will help more people become homeowners without jeopardizing the overall real estate market future.
There is a downside to the FHA mortgage insurance that very few borrowers recognize. With conventional mortgages, once the loan balance reaches 80% of the original purchase price of the home, the mortgage insurance is terminated. However, with FHA, mortgage insurance is never terminated and the borrower must pay it the entire life of the loan. On an average loan amount over a 30 year period, even with this new MIP reduction, an FHA loan will cost a borrower $16,000 more in mortgage insurance over a conventional loan.
For real estate investors, the MIP reduction will be very helpful. First, it will allow borrowers to pay slightly more for a house because the reduction in mortgage insurance will open up more money per month in the debt to income ratio. FHA buyers will be able to afford more house. Since many of the houses investors flip end up being purchased by an FHA buyer, the impact will be significant. Second, creative investors that take over FHA loans subject to will benefit from a lower monthly cost not related to principal or interest.
In general, it’s typically a very positive result when the government reduces the amount of money they are charging their citizens. FHA reducing MIP would fit into that category.
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