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FHA gets pricier, in the long run

By Holden Lewis · Bankrate.com
Thursday, August 12, 2010
Posted: 3 pm ET

FHA-insured home loans are about to get more expensive. If you're about to get a Federal Housing Administration-insured mortgage, you might want to act before October. But in some situations, you might want to wait.

This is complicated, so bear with me.

The FHA insures mortgages, and the insurance fund has taken a big hit in the past few years. FHA officials wanted to raise rates, but the law restricted what they could do. A few days ago, Congress granted the FHA more leeway to charge higher premiums.

OK, here we go ...

The FHA charges borrowers two premiums. There's the upfront premium, which is paid at closing. Then there's the annual premium, which is included in each month's payment.  I'll use the terms "annual premium" and "monthly premium" interchangeably.

Until last week, the FHA was charging the highest monthly premium allowed by law. The FHA said that wasn't enough to cover its projected claims. So last week, Congress increased the allowable monthly premiums.

Following me so far? Now, to make things simpler, let's stipulate that, from now on, we're talking about FHA insurance on a $100,000 purchase mortgage in which the borrower made a down payment of at least 5 percent.

Right now, until Oct. 4, the buyer would pay an upfront premium of 2.25 percent of the loan amount. That premium can be added to the amount borrowed. Most borrowers do this; they roll premium into the mortgage. This same buyer, until Oct. 4, would pay an annual premium of 0.5 percent of the loan amount.

Starting Oct. 4, the upfront premium on this purchase loan will drop to 1 percent from the current 2.25 percent. But the annual premium will rise to 0.85 percent from the current 0.5 percent.

Here's how it shakes out for a buyer who puts at least 5 percent down, borrows $100,000 at a mortgage rate of 5 percent, and rolls the upfront premium into the loan:

On a $100,000 loan, the monthly payment will be $22.45 higher under the new fee structure that begins Oct. 4. So FHA insurance will cost more, right? Well ...

"It depends on a homeowner's timeline," says Dan Green, loan officer for Waterstone Mortgage in Cincinnati. "For homeowners planning to sell in the next few years, it may pay to wait for application until after Oct. 4. The breakeven point on the new-versus-old system is 43 months."

Here's what he means: Right now, you have to pay a bigger up-front premium and smaller monthly premiums. Under the new plan, you'll pay less up-front but more every month. And under the new plan, the bigger monthly payments will outweigh the smaller up-front payment after 43 months.

Bottom line: If you think you'll sell the house in less than four years, it'll be cheaper to wait until Oct. 4 or later to apply for your FHA loan. But if you plan to keep the house for more than four years, it'll be cheaper, in the long run, to apply for the loan on or before Oct. 3.

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14 Comments
Mark Smith
August 15, 2010 at 4:24 pm

So if these new premium structures apply to streamline refinances and a borrower recently paid 2.25% premium on a purchase. Will that mean the PMI prorated refund could exceed the new 1% upfront requirement and FHA will be handing out refunds?

Holden Lewis
August 13, 2010 at 12:04 pm

Karen, the following information is three weeks old. I don't know if anything has changed since then, but here's what I know:

HUD, through the FHA, insures most reverse mortgages. In recent years, the FHA has paid out more in mortgage-insurance claims than it had expected. Earlier this year, the FHA raised insurance premiums, and on Oct. 4 they'll again make changes in the insurance premiums they charge.

That's just background information, just to let you know that the FHA is focused on stopping its financial losses. In the paragraph above I mentioned the changes in the premium structure coming Oct. 4. As far as I know, those changes aren't what your MetLife loan officer is talking about. I want to make this explicit to avoid confusion.

Oct. 1 is the beginning of the federal government's new fiscal year. The FHA asked for a taxpayer subsidy to cover potential losses in the reverse mortgage insurance program. The FHA asked for a $250 million subsidy. The last I knew, a House subcommittee (not the entire appropriations committee) had pledged $150 million. "If that were to disappear, then HUD would have to go back and make a severe cut in the amount of money that people would be able to get," Peter Bell, president of the National Reverse Mortgage Lenders Association, told me July 20.

Sorry to take so many words to answer a simple question. It boils down to this: Without a taxpayer subsidy of the reverse mortgage program, HUD will ration reverse mortgages by reducing the amount of money that homeowners can get in a reverse mortgage transaction. The other option would be to limit the number of reverse mortgage transactions.

Karen
August 13, 2010 at 9:09 am

Do you know if there are some issues in this finance bill that affect reverse mortgages as well. We are in the application phase of a reverse mortgage and our agent with MetLife says that there will be disadvantages coming in October. What are they exactly? He says something about less money in our pocket and some closing cost changes. So it is best to get this done before October.

Holden Lewis
August 12, 2010 at 5:05 pm

Ahibono,
On Tuesday HUD announced that they're moving back the new premium structure to Oct. 4. Originally it was Sept. 7, but lenders said it would be difficult to implement the changes that quickly, so HUD moved the deadline back a month.
http://portal.hud.gov/portal/page/portal/ver-1/HUD/federal_housing_administration/docs/BottStatementPremiumChanges.pdf

Ahibono
August 12, 2010 at 5:01 pm

Let's not lose sight of the 80% increase in Monthly MI premium. If you are applying for a loan, you may want to do the math to see which is more beneficial. Please remember that the monthly MI will stay with you for at least 5 years and until the balance of your loan is at most 78% of the value. For some, that's a long time.

Ahibono
August 12, 2010 at 4:57 pm

All FHA loans will be affected. The increased monthly Mortgage Insurance (MI) premium ahead of us will be felt most by borrowers who are close to qualifying. This increase will now be felt by the Debt-to-Income ratio increase which may cause a loan to be denied. These changes go ito effect September 7, 2010.

@susan - Make sure to inspect the entire quote including fees and APR, not just generic rate. Not only is unethical to bait and switch clients, it is also illegal. Mortgage companies must be able to offer the rates and fees they advertise on the date indicated. They could and should lose their license otherwise.

http://loangoose.com

Holden Lewis
August 12, 2010 at 4:54 pm

Chris,
The FHA says the new premium structure applies to "all new case numbers effective October 4, 2010." So, yes, the new premiums apply to FHA streamline refis, too.

Chris
August 12, 2010 at 4:33 pm

Holden,

Will these new rates also be applied for FHA refinances? I was just speaking with a loan officer who quoted the 2.25% number for the streamline FHA refi. I'm assuming refi FHA loans would also go through these changes once we hit October?

Holden Lewis
August 12, 2010 at 4:10 pm

I don't know what to tell you, Susan. I would hope that the vast majority of the advertisers are honest. But I don't work in the advertising or quality control departments. I don't want them to tell me how to do my job, so I don't tell them how to do their jobs.

I assume that if you ask the BBB about any lender, you'll find some complaints.

susan crozier
August 12, 2010 at 3:35 pm

I check mortgage rates regularly on Bankrate.com I've noticed on there is a about 1% spread between the companies' advertised rates. Before contacting 2 of the companies, I checked the Consumer complaints board. Both companies had complaints posted from customers who cited the companies for misrepresentations, asking for more money, cheating them out of their applications fees.

How can I trust any of the mortgage companies advertised on Bankrate.com?

Please advise,