It is now confirmed that FHA is set to change its mortgage insurance on October 4th 2010. There is good news and bad news. The good news is that the Up Front FHA Mortgage Insurance Premium is being reduced. The bad news is that the monthly mortgage insurance is going up.
I first talked about the FHA mortgage insurance changes here and then here. In some aspects things worked out better than I thought. But at the end of the day there is still an increase in cost to deal with.
The Upfront Mortgage Insurance Premium (UFMIP) will decrease from 2.25% to 1.00%. That is good news. On a $400,000 purchase price, with a 96.5% loan amount (FHA’s minimum down payment is 3.5%) this equals a $386,000 loan amount. Under the old mortgage insurance the UFMIP was $8,685, under the new plan it will be $3860. Since you are financing a lesser amount, you are paying a lesser amount every month to the tune of about $25 a month.
The Monthly Mortgage Insurance Premium (MMI) will increase from .55% to .90%. Using the above example, here is how those numbers would look:
Old method: $176.91 a month
New method: $289.50 a month
In this case you are paying an extra $112 a month over the old method. But you are saving $25 a month because you have a lesser UFMIP. So the net monthly cost is $87 a month higher. Not really the end of the world, but it is worth taking notice. Also, when you sell the house you will owe less money on it now under the new method. This is because you are financing a much lesser UFMIP, so the $87 a month extra gets paid back since you will owe less. The net effect is that this is not a huge change financially. But it is going to be an extra $87 a month to qualify for which will take an extra $3600 a year in income to qualify for. So it makes it a bit harder to qualify for the same loan amount under the rules.
Please note that this new law also gives FHA the authority to raise the Annual premium at will up to 1.55% for a 96.5% Loan-to-value loan.