The Federal Housing Administration has lowered its monthly mortgage insurance premium (MIP) by 0.25% on closings that occur after Jan. 27, 2017.
On FHA loans, which allow a down payment as low as 3.5%, there is an upfront MIP of 1.7% added to the initial loan amount, and thereafter 0.85% of the remaining principal is charged each month. That monthly MIP fee was just reduced to 0.6%. This reduction is projected to save FHA-insured homeowners an average of $500 annually.
FHA no doubt made this change due to a loss of market share, but it was made possible because FHA’s fund for covering loan defaults is back above its congressionally mandated level. In the past, only FHA loans allowed buyers to have such a low down payments, but now many conventional lenders are offering down payments as low as one percent. When conventional lenders charge mortgage insurance on low-down payment loans, it could be an upfront fee at closing or a monthly fee (not both), and it goes away when the borrower reaches 20% equity (verified by an appraisal). The MIP on FHA loans lasts for the life of the loan, which remains a serious competitive disadvantage for FHA loans.
Published Jan. 19, 2016, in the YourHub section of the Denver Post