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Posted 07/13/2015

“Effective” FHA Mortgage Rates Drop; FHA Loans Even Cheaper

FHA MIP is lower in 2015, dropping "effective" FHA rates to all-time lows

FHA Interest Rates

FHA interest rates are the interest rates assigned to loans which are insured by the Federal Housing Administration under its 203k mortgage program, better known as the "FHA mortgage". The FHA mortgage program insurance mortgage lenders against loss, which allows banks to offer reduced rates to borrowers. FHA mortgage rates can be 100 basis points (1.00%) or more below rates for similar conventional home loans, especially for borrowers with less-than-perfect credit.

FHA Loan Costs Drop With New MIP

It's getting cheaper to use FHA loans to buy or refinance a home.

Since January 26, 2015, the date that the Federal Housing Administration (FHA) introduced a new, lower annual mortgage insurance premium (MIP), homeownership costs have been ultra-low for FHA borrowers nationwide.

Combined with today's low FHA mortgage rates, literally millions of U.S. homeowners are now in position to FHA refinance; and purchasing power is up 12% when FHA loans are used for a home purchase.

It's an excellent time to comparison shop FHA-backed loans -- especially for borrowers with FICO scores of 700 or below. The long-term cost of an FHA loan is now competitive with comparable conventional loans and, in some cases, may be a better long-term option.

Click to see today's rates (Jul 30th, 2016)

The FHA And Mortgage Rates

The term "FHA loan" is somewhat of a misnomer. There's, technically, no such thing. This is because the Federal Housing Administration (FHA) is not a mortgage lender and can't make loans.

Rather, the FHA is a government agency which provides insurance to mortgage lenders which make loans, including banks and credit unions.

The FHA insures these lenders against losses on loans which meet the FHA's minimum loan qualification standards.

This set of loan standards is more commonly known as the "FHA mortgage guidelines". Loans which meet the FHA's mortgage guidelines are eligible for the FHA's insurance.

Because it's not a direct lender, the FHA has no say in program mortgage rates. Instead, FHA mortgage rates are set by Wall Street based on the going price of a Ginnie Mae (GNMA) mortgage-backed security (MBS).

Mortgage-backed securities are bonds openly traded on Wall Street.

Ginnie Mae bonds are also used to set rates for VA loans, which are guaranteed by the Department of Veterans Affairs; and for Rural Housing loans, which are guaranteed by the USDA.

However, despite its lack of influence over FHA mortgage rates, the Federal Housing Administration does affect the cost of carrying an FHA-backed loan. This is because the agency charges adds a mortgage insurance premium (MIP) to all of its loans, which is billed to homeowners monthly.

Today, FHA MIP adds between 0.85 and 1.10 percentage points to a borrower's effective FHA mortgage rate, where "effective mortgage rate" is the actual FHA mortgage rate you get from your lender, plus the annual MIP rate which is charged by the FHA.

Most FHA loans require 85 basis points (0.85%) of FHA MIP annually.

Click to see today's rates (Jul 30th, 2016)

FHA MIP Affects "Real" FHA Mortgage Rate

The FHA is a government agency and, by law, it's required to maintain $2 in its Mutual Mortgage Insurance (MMI) fund for each $100 that it insures. The MMI is the agency's "cash reserves"; the account from which insurance claims are paid.

In late-2012, the agency's reserves went negative, the result of a higher-than-expected number of claims for FHA-insured loans from between 2007-2009, and the agency's own misread of its financial position.

The FHA raised its premiums six times in five years to bolster its reserves.

Some years, the FHA raised its upfront MIP -- the amount paid to the FHA at the time of closing -- to capture more funds. Other years, it raised its annual MIP to effect the same.

With each change, though, the cost of using an FHA-backed loan increased.

The recent FHA MIP history for 30-year loans with 3.5% down is as follows:

  • Prior to January 2008 : 0.50% annual MIP plus 1.50% upfront MIP
  • October 2008 : 0.55% annual MIP plus 1.75% upfront MIP
  • April 2010 : 0.55% annual MIP plus 2.25% upfront MIP
  • October 2010 : 0.90% annual MIP plus 1.00% upfront MIP
  • April 2011 : 1.15% annual MIP plus 1.00% upfront MIP
  • April 2012 : 1.25% annual MIP plus 1.75% upfront MIP
  • April 2013 : 1.35% annual MIP plus 1.75% upfront MIP
  • January 2015 : 0.85% annual MIP plus 1.75% upfront MIP

Note the latest FHA MIP change. On January 26, 2015, the FHA lowered its annual FHA MIP rates for the first time since 2001. The FHA now charges just 0.85% annually -- a 50 basis point (0.50%) reduction for borrowers with 30-year loans.

Combined with today's interest rates, the new, lower rates for FHA MIP have lowered effective FHA mortgage rates to their lowest levels in history.

Click to see today's rates (Jul 30th, 2016)

FHA Streamline Refinance: Even Lower Effective Rates

For as low as today's effective FHA mortgage rates are, some FHA-backed homeowners can access pricing which is even better,

Via the FHA Streamline Refinance, homeowners whose current mortgage carries an endorsement date of May 31, 2009 or earlier are required to pay just 0.55 percent in annual FHA MIP.

For such loans such as these, then, FHA mortgage rates plus the annual cost of FHA MIP can be 4.00% or lower, even.

Qualifying for the FHA Streamline Refinance is simple. Homeowners must only meet three qualifying criteria :

  1. At least 6 payments must have been made on your current mortgage
  2. No mortgage payments may have been missed in the last 3 months
  3. There must be a "net tangible benefit" to refinancing; a legitimate purpose

For homeowners meeting these three criteria, getting approved can be simple.

According to current FHA mortgage guidelines, for homeowners using the FHA Streamline Refinance, no home appraisal is required; nor is there a required verification of income, assets, or employment.

In addition, underwater mortgages are eligible for the FHA Streamline Refinance and homeowners can be retired or unemployed. Even better, closings typically occur within 30 days of application.

All FHA-insured homeowners are eligible for the FHA Streamline Refinance -- not just homeowners whose loans pre-date June 2009.

What Are Today's Rates?

The monthly cost of an FHA mortgage is lower than it's been in history. It's an excellent time to compare FHA rates and see for what you'll qualify.

Get today's live mortgage rates now. Your social security number is not required to get started, and all quotes come with access to your live mortgage credit scores.

Click to see today's rates (Jul 30th, 2016)

The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.

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2016 Conforming, FHA, & VA Loan Limits

Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)