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.