The Suspended FHA Mortgage Insurance Rate Cut

By Jon Miller, Realtor®

Highlights

  • FHA Home Loans are government backed low-down payment and are often used by first-time home buyers and home buyers with lower incomes.
  • Borrowers pay a monthly insurance premium to protect the lender in the case of default on the loan.
  • The monthly insurance premium was reduced under the Obama Administration.
  • The new Administration suspended the reduction within hours of the inauguration.

The Details

On December 27, the Department of Housing and Urban Development announced that they would be decreasing the mortgage insurance rates for FHA loans from .85% to .60%, a decrease of .25%. The change was scheduled to take effect on January 27, 2017. The decision to reduce the rate was reversed by the incoming Administration on Inauguration Day.

FHA loans are a government-backed mortgage often used by both first-time home buyers and lower income home buyers. These mortgages are a common loan option for first-time home buyers and lower income home buyers because of the low down payment requirement of only 3.5% of the purchase price.

Much like most bank-backed Conventional loans with less than a 20% down payment, FHA borrowers pay a monthly insurance premium, called a Mortgage Insurance Premium (MIP), as part of their loan payment. The insurance premium protects the lender in the case of loan default. The change in the interest rate affects this insurance premium.

With the current rate of .85%, the monthly mortgage insurance payment would be about $70 per $100,000. With the rate cut to .60%, the payment would be about $50 per $100,000. For every $100,000 in purchase price for a home, there would have been a monthly savings of approximately $20.

The National Association of Realtors estimates that the decision to reverse the rate cut will affect 700,000 to 800,000 home buyers.