FHA Changes Are Coming In October

         A big change is coming for FHA loans beginning (for new loans that get a case number assigned on
or after) October 4. FHA is dramatically lowering its upfront mortgage insurance premium, from 2.25% of the
loan amount to 1%.
        That would result in an immediate savings of $1,250 for every $100,000 in loan amount, so this is going to save $3,750 on a $300,000 loan. Because upfront premiums are typically added into the final loan amount, this change will not reduce the amount of cash needed at settlement for most borrowers, but it will lower the initial principal balance.
         However, to compensate (and then some over time), FHA will increase its monthly premium, which is
calculated on an annual basis and then spread over twelve months, by 0.35% of the loan amount. FHA borrowers have been paying monthly mortgage insurance equal to 0.55% of the loan when they make a downpayment of less than 5%. The minimum downpayment and the one most homebuyers opt for is 3.5%.
         With a downpayment of 5% or more and on loans amortized over 15 years, the monthly rate has been 0.5%. After the change, for downpayments of less than 5%, the rate will be 0.9% of the loan amount and 0.085% for downpayments of 5% or more and 15-year loans.
         So, for every $100,000 in loan amount, there will be a higher monthly premium of $29.17 ($100,000x0.0035 divided by 12) or $87.50 on a $300,000 loan.  By reducing initial mortgage balances, the change will make it easier to refinance in the future. The monthly premium increase exceeds the amount saved from the upfront premium change after 42 months.