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Low FHA Rates But Higher Mortgage Insurance Premiums Forecasted

December 5th, 2012

This has been a monumental year for low interest rates and FHA loan origination. The interest rates have never been lower, but FHA reserves have been nearly depleted once again as loan defaults surged last quarter. Any decline in a home’s value leaves homeowners upside down which for some provides little incentive to keep making the payments when a family’s income declines. Due to this factor and the fact that FHA lenders are more lenient on credit history than conventional loans, the FHA insurance program has been losing money due to defaults and foreclosures. In response FHA is increasing the premium on its mortgage insurance sometime in 2013.

FHA loans currently require the borrower to pay the monthly mortgage insurance premium for a minimum of five years, after which time, the premium may be waived if the loan to value ratio has fallen to 78%; however, effective next year, FHA mortgages will require borrowers to pay the monthly mortgage insurance premium for the life of the loan. All signs point towards premiums being raised next year. The likelihood of FHA offering home equity credit lines for bad credit are about the same as premiums not rising in the year to come. There are just too many delinquencies and defaults for FHA not to hike the mortgage insurance premiums.

The mortgage insurance premium effectively raises the interest rate 1.25%. When adding the mortgage insurance premium to a 30 year fixed rate for an FHA loan at 3.25%, the real rate is closer to 4.5%. The upfront mortgage insurance premium has been 1.75% of the loan amount. On a $400,000 loan, that amounts to $7,000 but the good news is that it can be financed by adding that fee to the base loan amount; therefore, the new loan would become $407,000.

There are numerous considerations when exploring mortgage options; borrowers are advised to consult with one or more mortgage professionals who are experienced in both FHA and conventional loans before making a final decision. Read the original Mecury news article.


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