All FHA case numbers ordered after October 4, 2010 will be subject to the changes made to the FHA Mortgage Insurance guidelines. FHA requires borrowers to pay into their insurance plan two ways:
(1) With a one-time, payment at closing called “Upfront MIP”
(2) With a monthly, pro-rated annual payment called “Annual MIP”
Recently, I have been reading and hearing a lot of negative press on the proposed changes to the FHA Mortgage Insurance guidelines, but I am not convinced that it is as bad as it looks… I’ll let you determine that based on your financial goals along with the information provided below.
Summarizing The FHA Mortgage Insurance Changes
In an attempt to rebuild their reserves, the FHA is changing its upfront and annual mortgage insurance premium structure. This is the second adjustment of 2010 and these changes apply to all FHA case numbers issued on or after October 4, 2010.
Under the updated mortgage insurance program, assuming a 30-year fixed rate FHA mortgage with at least 3.5 percent equity:
– Upfront MIP drops to 1.00% of the amount borrowed from 2.250%
– Annual MIP increases to 0.90% of the amount borrowed from 0.500%
For homeowners using an FHA-insured mortgage, the upfront cost of the loan will drop by a lot, but the long-term costs of the loan will grow. Using a $400,000 mortgage as an example, upfront MIP falls to $4,000 from $9,000; monthly MIP jumps to $303.00/mo. from $187.00/mo. The FHA expects the change to yield an additional $300 million in premiums monthly, which will help to re-build their reserve account from $3 billion to back up to $19 billion (ish), where it was prior to the housing/foreclosure meltdown.
See the chart below for a more accurate breakdown:
Work The Change In FHA Premiums To Your Advantage
So which is best then?
– Current system : Big upfront costs, low long-term costs
– New system : Low upfront costs, big long-term costs
I personally believe that it depends on your timeline and your financial goals.The mathematical break-even point on the current FHA system versus the new occurs in Month 43. If you know you’ll sell or refinance in fewer than 3 years, 7 months, then you are safe to start your mortgage application after the October 4, 2010 changeover. On the other hand, if this is your “last home for life”, the previous guidelines were more cost effective.
The math works for all loan sizes, too — from $75,000 all the way up to the FHA loan limits for your area. In King and Snohomish County, the max FHA loan limits are $567,500. I break down Seattle Jumbo FHA Financing in a previous blog post.
Catch up on the details to the changes to FHA Mortgage Insurance Guidelines by reading the HUD Mortagee Letter 2010-28