Reducing mortgage insurance premiums
Mortgages backed by the Federal Housing Administration (FHA) are getting a cost-saving revamp in 2023.
The loan type — already a more affordable and accessible option for borrowers — will lower its mortgage insurance premium (MIP) rates by 30 basis points beginning on March 20.
An estimated 850,000 borrowers will benefit this year from the new rule, with an average annual savings of $800, according to The White House.
Good news for FHA borrowers
FHA loans typically have lower mortgage rates than the overall market average and are geared toward first-time home buyers and borrowers with smaller down payment amounts.
In 2022, first-time buyers made up 83.52% of FHA purchase loans and 43.75% were low-income borrowers, according to the Department of Housing and Urban Development (HUD). The rest of the lending market had shares of 46.5% and 22.91%, respectively.
As the government-backed mortgage type reduces the financial burden for its borrowers, more people will be able to attain homeownership and start building wealth. This is especially helpful after many potential home buyers were priced out of the market in recent years due to soaring property values, inflation and interest rate growth.
“This action will boost the housing recovery and reduce the cost of housing for creditworthy borrowers, particularly first-time home buyers,” said Alicia Huey, chairman of the National Association of Home Builders. “While the White House reports this new premium structure will save home buyers and home owners an average of $800 per year, it will also help to ease tighter credit conditions in the mortgage market that are harming affordability.”
The brass tacks
FHA-backed loans allow its borrowers to put down as little as 3.5% of their home’s purchase price. Because of the lenient underwriting standards and low down payment percentage, they come with a downside. FHA borrowers pay MIP to account for the lender’s risk in case of a default.
Your loan-to-value ratio determines your MIP rate. Below is the full breakdown of the new MIP change compared to the previous rule for FHA mortgages with terms of over 15 years.
|Base loan amount||Loan-to-value ratio||New MIP||Old MIP||Duration|
|$726,200 or less||≤ 90%||0.50%||0.80%||11 years|
|>90% and ≤ 95%||0.50%||0.80%||Total mortgage term|
|>95%||0.55%||0.85%||Total mortgage term|
|Over $726,200||≤ 90%||0.70%||100%||11 years|
|>90% and ≤ 95%||0.70%||100%||Total mortgage term|
|>95%||0.75%||100%||Total mortgage term|
In simpler terms, the rate of savings totals $300 per year for every $100,000 on a mortgage. For example, you’ll save $1,200 annually if your FHA home loan is $400,000 under the new rule.
Advice for home buyers
If you don’t have enough money saved to pay a large down payment or your credit score isn’t as high as you’d like, an FHA loan could be your ticket to homeownership. And fortunately, the associated borrower costs are dropping starting March 20, 2023.
“The lower premiums will expand homeownership opportunities by lowering mortgage payments for qualified FHA borrowers, providing critical relief from the steep rise in mortgage rates and home prices just in time for the spring buying season,” said Mortgage Bankers Association President and CEO Bob Broeksmit.
If you’re ready to become a homeowner and an FHA mortgage is right for you, reach out to a local lender to see what interest rate you qualify for.