Starting September 7th, the Federal Housing Administration will raise the annual fees it charges FHA borrowers for mortgage insurance. Lately a huge percentage of buyers have been using FHA loans since they are one of the few options left for a low-down-payment purchase. The annual mortgage insurance fee will initially rise from 0.55% to 0.85% of the loan amount, but is authorized to go as high as 1.5%, at which point it could make housing less affordable to many buyers. To help ease the pain of higher annual fees, FHA is going to reduce the up-front mortgage insurance premium from 2.25% of the purchase price to as little as 1%, but most buyers will notice this less since it is usually financed into the loan, whereas the annual fee is paid every month as part of the mortgage payment.
The benefits of FHA loans are great - downpayments as low as 3.5%; an allowance for up to 5% seller assist to cover closing costs; low interest rates (as low as 4.25%!); and fairly lenient credit standards relative to conventional loans. The two downsides to FHA loans have always been their appraisal process, which often requires minor repairs be made prior to closing, and the mortgage insurance premiums charged by FHA at closing and on an ongoing monthly basis. While the appraisals and accompanying repairs have become a fact of life that most buyers and sellers now accept, there's no reason to accept higher mortgage insurance rates if you're ready to buy now - get approved for an FHA loan and lock in the current, lower mortgage insurance rates before September 7th. You'll also be locking in a great interest rate at the same time so it's a real win-win!
As an example of how the increased fees will look after September 7th, let's look at an example. Here we assume a purchase price of $100,000, 3.5% downpayment, an interest rate of 4.5%, and we assume that the Mortgage Insurance Premium Due at Closing is rolled into the loan amount, as is typical:
Before 9/7/10 - Monthly Mortgage Payment (Principal, Interest, and Mortgage Insurance): $545.18
After 9/7/10 - Monthly Mortgage Payment (Principal, Interest, and Mortgage Insurance): $562.88
As you can see, buying before September 7th in this scenario would save the buyer about $18 per month - a total savings of at least $1,060 over the first five years when mortgage insurance is required. This may not sound like much, but if you're planning on buying in the first half of September anyway, it might be worth rushing to get it done before that deadline.
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