FHA Mortgage Insurance Fees Cut. But Will FHA Costs Fall Even Further?

FHA Insurance Rate Cut Offsets Some Interest Rate Increases For Homebuyers

Update: The Trump administration has repealed the FHA mortgage insurance fee reduction set to take effect January 27, 2017. No timeline has been set for re-introducing the cut.

HUD, the overseer of FHA, has released this statement:

FHA is committed to ensuring its mortgage insurance programs remains viable and effective in the long term for all parties involved, especially our taxpayers. As such, more analysis and research are deemed necessary to assess future adjustments while also considering potential market conditions in an ever-changing global economy that could impact our efforts. 

This post will remain active for archival purposes.

FHA annual mortgage insurance premiums are being cut by .25 percent for most borrowers. The reduction applies to FHA-backed mortgages closing on or after January 27, 2016.

This should offset some of the recent interest rate increases that have concerned would-be homebuyers. Most buyers, those with 30-year loans under $625,500 and 3.5 percent down payments, will save $250 per year, per $100,000 borrowed.

The New FHA Mortgage Fee Cut

Savings from lower FHA mortgage insurance premiums (MIP) are substantial. The below chart shows how much FHA borrowers will save if they choose a 20-, 25-, or 30-year FHA loan.

FHA home buyers who choose a 15-year loan will see premiums reduced between 20 and 45 basis points (0.20% - 0.45%) per year. That’s a savings between $200 and $450 per year, per $100,000 borrowed.

Most FHA streamline refinance applicants will not receive a reduction in their premium as compared to current levels. However, streamline borrowers who choose a new FHA loan with a term of 15 years — and have more than 10% equity based on their original purchase price — will receive a 30-basis-point reduction in premiums. MIP will drop from 0.55% to 0.25% per year. This represents very few FHA streamline applicants, however.

These reductions apply to new FHA applicants. Homeowners with an FHA loan already would have to refinance to take advantage of the premium cuts.

But Wait, There’s (Maybe) More

HUD announced that it’s lowered the FHA annual mortgage insurance premium (annual MIP) by .25 percent on January 9th, 2017, a move which is expected to save most new FHA borrowers $500 a year, according to HUD.

The new reduction is the second in two years, but it might not be the last. To understand why, we need to take a look at recent FHA history.

In January 2015 HUD lowered the FHA premium by .50 percent from 1.35 percent to .85 percent, and the result was more than 300,000 additional FHA-insured loans in fiscal 2015, the period that ended in September 2015.

With the new announcement, the annual MIP will fall to .60 percent for most FHA borrowers as of January 27th.

Here’s the history of FHA MIP since nine years ago, based on a loan amount below $625,500 and a down payment of less than five percent:

• Prior to January 2008 : 0.50% annual MIP plus 1.50% upfront MIP
• October 2008 : 0.55% annual MIP plus 1.75% upfront MIP
• April 2010 : 0.55% annual MIP plus 2.25% upfront MIP
• October 2010 : 0.90% annual MIP plus 1.00% upfront MIP
• April 2011 : 1.15% annual MIP plus 1.00% upfront MIP
• April 2012 : 1.25% annual MIP plus 1.75% upfront MIP
• April 2013 : 1.35% annual MIP plus 1.75% upfront MIP
• January 2015 : 0.85% annual MIP plus 1.75% upfront MIP
• January 2017 : 0.60% annual MIP plus 1.75% upfront MIP

Housing Markets Help FHA And FHA Homebuyers

What makes the new FHA premium reduction possible is the recent strength of the housing market. Home prices have been rising consistently for almost five years. The National Association of Realtors reports that in November existing home prices reached $234,900, the 57th consecutive month of year-over- year gains.

Higher home prices tend to produce widespread happiness, and some of that financial sunshine impacts the FHA. The FHA is not a lender. It insures mortgages that meet its standards, and with such insurance, lenders can make loans with just 3.5 percent down instead of the customary 20 percent requirement.

In turn, because the FHA is a form of insurance, it needs reserves — money to pay claims when borrowers do not repay their loans. It gets that money by charging premiums.

How The FHA Mortgage Works

The FHA collects two forms of premiums, First, there is an upfront mortgage insurance premium (the upfront MIP), which is now equal to 1.75 percent of the mortgage. This cost does not have to be paid in cash at closing, it can be added to the mortgage amount.

However, it is a real cost. It produces a higher loan amount and increases your monthly payment.

The second type of FHA insurance cost is the annual mortgage insurance premium (annual MIP).

Once the new cut goes into effect, it will be equal to .60 percent of the outstanding loan amount for most borrowers (see the table above).

As you pay down your mortgage, the loan balance falls. That means the cost of the annual MIP also drops — every year, it’s recalculated based on your mortgage balance.

The money collected by the FHA goes into its Mutual Mortgage Insurance Fund (MMIF), and here we get to some very good news: In fiscal 2016 FHA reserves increased by $3.8 billion, and its the capital ratio reached 2.32 percent, far more than the two percent required by Congress.

Are More FHA Premium Cuts Ahead?

Mortgage rates have risen since last summer, and one way to offset higher interest levels for FHA borrowers is to reduce insurance fees. So, in addition to the just-announced FHA cut, there are several areas which could be fertile ground for further cost reductions.

First, the FHA annual mortgage insurance premium is now at .60 percent. However, the annual MIP stood at .50 percent in 2008, so an additional adjustment is possible.

For a $100,000 FHA loan, the savings would amount to about $100 in the first year.

Second, until 2010, the FHA upfront premium was 1.00 percent. That’s a lot less than the 1.75 percent which is now in place, a $750 difference for a $100,000 FHA loan.

Are additional FHA cuts really possible in 2017? Possibly, but we all need to see how the economy evolves. The reason there are now fewer claims against the FHA’s reserves is that home values have generally been rising.

For borrowers who get into financial trouble, higher prices mean there’s enough equity to sell the property and avoid foreclosure. Even if there is a foreclosure, extra equity means fewer losses for the insurance fund because foreclosure proceeeds are higher.

This is great for borrowers and also good news for the FHA reserves, but what if home prices stall or even decline? In that case, the FHA would no doubt keep MIP levels in place or perhaps even raise them once again.

What Are Today’s FHA Mortgage Rates?

Current mortgage rates depend on whether you choose a conventional or FHA mortgage, the amount of your down payment, and the strength of your credit and income.

You can get the best deal on an FHA mortgage by comparing rates and terms from several competing mortgage lenders.