Starting on April 1, 2013, the mortgage insurance premium will go up by .1% to 1.35%. While this is small, this is the most expensive mortgage insurance of all loans available in the market! This is also on top of the more than doubling of FHA mortgage insurance two-years ago. These staggering increases in mortgage insurance is highly expected to continue the decreased use of FHA loans.
To add insult to injury, on June 3, 2013, FHA mortgage insurance, which currently goes away when your loan-to-value drops to 78%, will be changed to “life of loan”. Another words, it will NEVER go away, regardless of down payment or loan-to-value. This will only be one NEW loans. Existing FHA loans will not change.
Example: Purchase Price $175,000 3.5% down payment at 4% mortgage rate on 30yr. Currently, that mortgage insurance would end at 78%, and cost someone $20,838. Under the new rule, the mortgage insurance would be on the loan forever, and cost someone $42,447 – MORE THAN DOUBLE the cost.
There are buyers that qualify on income and credit who may not have the necessary additional down payment required for the 5%, or 10% down conventional loans. The 3.5% FHA program has provided a great vehicle to get into a home with a minimum amount of cash.
The average time for FHA mortgage insurance to go away is about 9.5 years. So for homeowners who anticipate staying in their home for ten years or less, the new changes might not have much financial impact. However, homeowners who expect to be in their home longer should seriously consider going with a 5% down conventional loan if at all possible.
For buyers currently in the market, you can avoid these increases by acting now.