Mortgage

President Biden may reduce FHA mortgage insurance coverage premiums. That is what it means for you:

FHA mortgage insurance could get cheaper this year

"The mortgage industry is full of speculation about the cut in the FHA-MIP," said a trade magazine on January 28. And this journalist was right.

Many insiders are confident that the Federal Housing Administration (FHA) will lower the annual mortgage insurance rates sharply.

FHA borrowers currently pay 0.85% of mortgage insurance premiums (MIP) annually. That's $ 1,700 a year, or $ 140 a month for a $ 200,000 mortgage.

So it's no wonder that a potential MIP rate reduction is big news. It could help new home buyers and homeowner refinancing to save big bucks on their housing allowance payments.

Check Your FHA Loan Eligibility (February 8, 2021)

Why Experts Believe Biden Will Cut Mortgage Insurance Premiums

Lowering FHA mortgage insurance rates is not a new idea from President Biden. It's a holdover from former President Obama's agenda.

American Banker Magazine states, "The Department of Housing and Urban Development under former President Barack Obama announced that it would cut the FHA's annual mortgage insurance premiums by 25 basis points (0.25%) shortly before President Donald Trump took office."

However, Trump reversed that change early in his term, leaving FHA MIP rates at 0.85% per year.

Now, according to American Banker, "observers expect the Biden administration to make that 25 basis point cut and possibly go further."

Lowering the MIP cost of FHA would be in line with President Biden's goals of expanding affordable housing for low- and middle-income families.

This is of course only speculation for the time being. No official announcements were made.

But the spread of the rumor – and the lack of rejections from the administration – mean a change seems likely.

Potential home buyers and FHA homeowners should therefore be aware of what the (potential) change would mean for them.

What a MIP reduction could mean for you

There is good news and bad news.

The bad news is that if you already have an FHA loan you will not see any savings if the reduction takes effect. You would have to refinance into a new FHA loan to see the reduction.

The good news is that if you haven't applied for an FHA loan, when / when the cut is announced, you will likely be able to take advantage of the new, lower fees.

But how much would home buyers and refinancers save?

A reduction of 25 basis points means that MEP rates would decrease by 0.25%. So you pay 0.6% of your loan balance every year instead of the 0.85% that almost all FHA borrowers now pay.

These mortgage insurance rates are calculated annually, but are calculated monthly.

Example: Reduce the MIP rate by 0.25%

For example, let's say you plan to borrow $ 200,000 on an FHA loan. Your MIP rate at the current level would be 0.85%, which equates to an annual fee of $ 1,700 – or $ 140 per month.

Now let's assume that the new MIP rate drops to 0.6%.

Your annual fee drops to $ 1,200. And your new monthly MIP cost would be exactly $ 100 per month.

That's a $ 500-a-year savings that few of us would sneeze on. However, there is a chance the savings will be even greater.

Example: Reduce the MIP rate by 0.50%

American Banker wondered if the Biden administration "could possibly go further".

How does the math work when the annual MIP rates are lowered a little further – to 0.5%?

Assuming the same $ 200,000 loan, a 0.5% interest rate would reduce the annual payment to $ 1,000. And that would make the monthly payment just $ 83 versus $ 140 per month at the current level.

That would save you $ 700 a year versus your current payment.

Prices haven't changed yet …

Remember: this is just speculation. Unless and until an official announcement is made, you should continue to budget your full, existing MIP rate of 0.85%.

However, if you are considering buying a home or refinancing later this year, keep an eye out for news from the Department of Housing and Urban Development (HUD).

When a change is announced, it may be worth waiting for that application to apply until you can save the lower rate.

Check Your FHA Loan Eligibility (February 8, 2021)

What happens to existing FHA loans?

Homeowners with an existing FHA loan may not immediately benefit from lower mortgage insurance rates.

A reduction in the MIP rate would likely not change the terms of your current mortgage.

So when a change is announced, you'll need to refinance into a new FHA loan to take advantage of the MIP savings.

Think about streamlining the streamlines

The good news is that FHA borrowers may be eligible for an FHA Streamline Refinance – a simplified refi program with little documentation required.

FHA Streamline loans typically come with minimal paperwork, low cost, and no credit check. You probably don't need a new home appraisal or income check.

However, you will have to pay the closing costs yourself – only the upfront mortgage insurance fee can be included in the loan balance.

Withdrawal is not permitted with the FHA Streamline program. If you want repayment with your refinance, you need the FHA disbursement loan which requires a full subscription.

How the MIP reduction could contribute to the FHA streamline rule “Net Netible Benefit”

Currently, FHA Streamline Refinances require that you obtain a "net material benefit" (a clear monetary benefit) by using one.

This usually means that you need to lower your “combined interest rate” (mortgage interest plus mortgage insurance) by at least 0.5%.

For example, suppose the Biden administration lowers MIP rates by 0.25%. The current rule also requires you to lower your mortgage rate by 0.25% to be eligible for the Streamline refinance.

With interest rates trending down through 2020 and 2021, it is very likely that a 0.25% cut is within reach.

However, be aware that your current FHA loan must be at least 210 days old before you are allowed to refinance.

When could the change take place?

Some mortgage industry insiders expect an announcement from President Joe Biden during the first 100 days. And they can be proven correct.

However, there is a reason we seldom quote speculation from insiders in the mortgage industry. They are often wrong.

The fact is, no one outside the government knows if there will be an announcement at all, let alone the expected date. Which begs an important question: what should you do with this information?

What should you do with this information?

We wouldn't share this speculation with you if we didn't believe the rate cut is really good. However, there is no guarantee of it.

Therefore, you probably shouldn't change your immediate home purchase or refinancing plans.

Today's FHA mortgage rates are at all-time lows – and your interest rate has a much bigger impact on your overall borrowing costs than your mortgage insurance rate.

If you wait for an interest rate cut and miss today's low interest rates, it can wipe out your savings. You could also risk losing your dream home waiting for funding.

Keep in mind that after you buy or refinance your FHA home, you only have to wait 210 days – about 7 months – before you can go through the refinance again.

If Biden cuts the MIP rates, the change will be long-term. So you can refinance yourself at any time if it makes financial sense for you later.

Check Your FHA Loan Eligibility (February 8, 2021)

Will other aspects of FHA loans change?

Most of the people who choose an FHA loan do so because it is the easiest, most affordable way to own a home that is open to them.

American Banker describes FHA borrowers as "traditionally first-time homebuyers and mostly minority and low-income earners".

And they choose FHA loans because they can be approved with lower credit scores and higher existing debt than Fannie Mae, Freddie Mac, and other conventional loans usually allow.

None of this is likely to change if the Biden administration makes the rumored changes.

The only difference should be the amount these borrowers have to pay for their annual mortgage insurance.

Remember that there is also a UFMIP (Upfront Mortgage Insurance) fee which is equal to 1.75% of the loan amount. Most borrowers add this to their loan balance so they don't have to pay it when they close.

So far we haven't heard any talk of a change in the UFMIP rate – just the 0.85% annual mortgage insurance premium.

The final result

A reduction in the FHA MEP would be a huge win for borrowers and would help keep monthly housing costs down.

If you are looking to buy a home or refinance through an FHA loan later this year, there is a good chance you will see lower premiums on mortgage insurance.

However, if you're already buying or refinancing, we don't recommend waiting for news about lower MIP rates. You will likely see greater savings taking advantage of today's ultra-low mortgage rates.

Check your new plan (February 8, 2021)

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