New mortgage insurance premium rules are due to take effect on April, 1, 2013. The Federal Housing Administration (FHA) recently announced a series of changes that they feel will better manage and protect their insurance programs. Let’s talk about a bit about the mortgage insurance changes coming.
What is Mortgage Insurance?
Mortgage insurance is protection for the lender (not the home owner) in the event of mortgage loan default. When you buy a home and use a conventional loan and your down payment is less than 20 percent of the cost, or you are refinancing more than 80 percent of your home’s value, most lenders will require that you purchase mortgage insurance. This can be done on a monthly basis, paid by the lender by increasing the interest rate (LPMI) or by paying a lump premium upfront (BPMI). Even though the benefit of the insurance is there to protect the lender, it does allow the homebuyer to purchase their home with a lower down payment.
There are two major changes coming that will affect homebuyers using FHA financing to purchase their homes. According to recent FHA updates this is what you can expect:
- First, there will be an increase to the annual insurance premium paid by the borrower. Expect to see an increase of 0.10 percent or $100 per year for each $100,000 in the loan amount. For the average borrower this will be approximately $13/month. Of course, the premium itself will vary depending on the loan size, term and LTV (loan-to-value) ratio.
- Historically FHA automatically canceled mortgage insurance on most loans when the borrower, after five years, had made enough payments to reduce the loan balance to 78 percent of the original loan amount. The second major change to look for will be the mortgage insurance premiums on new loans will remain in effect for the life of the loan.
If you are in the home buying market, make sure you do your research ahead of time. Talk with your financial advisor and find a professional real estate agent who understands the market and the basics of available financing programs. Finally, make sure you use a reputable lender who will take the time to explain your options and help you pick the right program for your needs. The reason that we prefer to refer you to our lending professionals is not because we get anything from it, the reason is that a professional knows all of the ways to save you money and one bad decision can cost you thousands.
Please call or email if you have any questions. We’re always here to help!
Visit the FHA website for more details about the changes coming.