Ways to lower your insurance premiums

Question:

Is it true that FHA mortgages have become less expensive? How did they do that at a time when higher mortgage rates are an affordability problem?

Answer: e FHA program is an insurance plan. It’s a favorite with first-time buyers because with federal backing it can be used to borrow with little down and liberal qualification standards. e money for FHA financing comes from private-sector lenders. ey’re willing to make loans with 3.5% down in most cases because – if the borrower cannot repay the debt – the federal government will step in and make good on the obligation.

Yes. FHA costs have gone down.

Insurance is not free and that’s where the new discount comes in.

FHA borrowers have been paying two forms of mortgage insurance.

First, there has been an up-front mortgage insurance premium (the upfront MIP), equal to 1.75% of the loan amount. e upfront MIP amounts to $4,375 for a $250,000 mortgage. Borrowers, however, need not pay this money in cash, it can be added to the loan amount instead. e FHA collects the insurance premiums and puts the money in a reserve account called the Mutual Mortgage Insurance Fund (MMI Fund). e MMI Fund is required to equal at least 2% of the loans insured by the FHA. e 2% represents the Fund’s capital reserve ratio. e Fund’s latest capital reserve ratio is 11.11%. In other words, the FHA is a huge financial success and because it has so much money held in reserve it can afford to reduce insurance premiums. e premium reduction will take effect on March 20 and works like this: e annual MIP will remain unchanged at 1.75%. e annual MIP will fall from .85% to .55% for most FHA borrowers.

Second, there is an annual mortgage insurance premium (the annual MIP) equal to .85% of the mortgage amount. For a $250,000 mortgage, the annual MIP would cost about $180 per month.

What does this really mean for new borrowers?

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By Peter G. Miller

According to HUD, the typical new borrower will save $800 a year – about $75 a month. However, borrowers with bigger loans will save larger amounts. HUD estimates that someone with a mortgage of $467,700 – the national median home price as of December 2022 – will save $1,400 in the first year.

ese case savings add up to real money over time – $4,000 over five years for the typical borrower. However, there is another benefit as well.

When borrowers apply for mortgage financing, they must meet debt-to-income (DTI) requirements. In other words, only so much of the borrower’s gross income can be used to pay such monthly expenses as auto loans, student debt, credit card debt and housing costs. HUD has effectively made home buying more affordable by knocking down the upfront MIP.

Speak with local loan officers for details and specifics. If you have not qualified for FHA financing in the past, you might want to take a second look.

Email your real estate questions to Mr. Miller at peter@ctwfeatures.com.