On October 4th, FHA rules will change regarding Mortgage Insurance Premiums collected up front and the monthly rate charged. Any FHA case number issued after October 4th will be subject to the new rules. The application for a case number takes place after there is an accepted offer on a specific property. I worked with Columbia Mortgage’s Liz Marré to put this spreadsheet together to illustrate how the changes impact a buyer.
Every scenario will be different but for this case we used a $300,000 purchase and assumed a 4.25% 30 year principle and interest loan. Closing costs and other factors are not included. We added a 6% interest rate column as well.
The first rule change is a reduction in the financed up-front mortgage insurance premium will drop from 2.25% to 1%. That’s a loan reduction of $3,618 in this example. The second change increases the monthly insurance to .09% of the current loan which results in an initial increase of $67 per month even after the principal reduction from the first change. You must carry mortgage insurance until the loan to value (LTV) reaches 78%. On average, that takes about 10 years. Note: as the monthly insurance charge is based on that month’s loan principle the amounts of the one and five year comparisons are somewhat inflated as the monthly payments will drop slightly each month. This simplified version does not factor that in.
The other affect of the rule change is a reduction in buying power. Because of the higher monthly payment, the amount the buyer qualifies to borrow drops as well. A buyer who is purchasing at their max price ($300,000 in this case) has their loan maximum drop $13,600 which may prevent the purchase altogether.