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FHA Mortgage Insurance Premium To Rise In 2012 - OurBroker : OurBroker

FHA Mortgage Insurance Premium To Rise In 2012

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Borrowers will pay more to get an FHA loan in 2012. The much-heralded payroll tax cut worked out by Congress will also raise the cost of an FHA mortgage by at least .2 percent and probably more in 2012.

Think of it as a back-door tax increase. While the public was watching the payroll debate in Washington Congress was actually increasing the cost to finance or refinance a home.

The Temporary Payroll Tax Cut Continuation Act of 2011 was widely applauded because it prevented the Social Security withholding from increasing to 6.2 percent from 4.2 percent of wages. However, the extension is only for two months and is set to end as of February 29, 2012. In other words, the payroll tax debate will be renewed once Congress returns from the mid-winter recess.

New Borrower Costs

Buried in the payroll compromise are new costs for borrowers. Specifically, these new costs come in two forms.

First, Congress has directed Fannie Mae and Freddie Mac to increase the fees lenders pay by ten basis points or .10 percent. This new cost — called the g-fee — will begin April 1, 2012.

This increase is substantial. According to Market Watch, lender fees now amount to .26 percent of the loan amount. The congressional increase will cost borrowers with a $200,000 mortgage an additional $5,400 over a 30-year loan term.

Second, Congress has directed the FHA to increase its annual mortgage insurance premium or MIP by .10 percent.

The FHA, which is an insurance program, has two borrower charges.

  • There is an up-front mortgage insurance premium which rose to 1.75 percent of the mortgage amount in April 2012.
  • There’s also an annual mortgage insurance premium which in 2011 was increased to 1.15 percent for most borrowers. It will rise to 1.25 percent in April 2012.
  • As of June 11, 2012 the annual mortgage insurance premium will increase by .25 percent to 1.50 percent for FHA loan amounts in excess of $625,500.

The annual MIP increase will be costly to borrowers. The expense of a $200,000 mortgage will grow by about $4,200 over the life of the loan.

Taken together, the two increases created in the payroll tax bill will raise the cost of a $200,000 mortgage by roughly $9,600 over the life of the loan.

Impact

The result of the congressionally-mandated increases is that FHA loans will be artificially less attractive.

So is the MIP increase necessary?

The purpose of the MIP is to collect money from FHA borrowers which is placed in a reserve called the Mutual Mortgage Insurance Fund. This fund is supposed to equal 2 percent of the FHA loans outstanding but is now below the required level.

However, HUD has reported to Congress that under the current MIP structure the reserve fund will grow to the required 2 percent by 2014.

Moreover, the policies and programs which created problems for the FHA loan system — policies and programs and put in place by the Bush Administration prior to 2009 — have been changed. For instance, the required down payment has been raised, the mortgage insurance premium schedule has been changed, “seller-funded downpayment assistance loans” have been eliminated and lender standards have been tightened. The results are plainly visible when looking at the FHA’s book of business

Lenders will pass through the new charges, raising home financing costs nationwide at a time when the housing market remains stalled. Higher mortgage costs mean borrowers will qualify for less financing so they will have less ability to pay higher prices. Home sellers will thus feel part of the fee increase in the form of less buyer demand and reduced pressure to raise prices.

The net result of the congressional action is that borrowers will needlessly pay more for FHA financing and home sales will suffer. Various politicians will no doubt explain how the legislation made the FHA reserve fund “more secure” when, in fact, it was becoming more secure without a further increase in borrower costs.

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There Are 5 Responses So Far. »

  1. It’s hard to believe they are increasing monthly MI again. It has already started affecting business in a negative way. The biggest thing I have seen lately is on streamline refi’s. People that had .5 or .55 MI factors now facing 1.15 or to be 1.25%, find out that it’s not worth refinancing because the savings they would of had is wiped out by the increased MI. This will mean people will have less money to put into the economy and this will ultimately be another drag on the housing market. Not a good move when we are limping along as it is.

  2. As terrble as this is, im glad its only .10….someone told me it was going up 1 full point…..just sad bc of the MI increases, people cannot take advantage of the low rates that bc they are not meeting the 5% savings. I wish they would just increase the UFMIP .10 instead…..also another complaint i have with FHA is people that are currently in ARMs cannot take adavantage of streamlining into these great fixed rates bc they cannot save the 5%….this is a guideline that needs to change….going from a ARM to a Fixed is still a great benefit to the borrower, but they cannot take advantage of now.

  3. Sucks – I have an FHA loan and I can’t take advantage of these great rates because of the increasing MI. My rate could decrease a full % (with an already good rate), but I would only be saving $30 a month because of the high MI rate. I don’t get the purpose of raising it – it prevents people like me, who could and would be spending more on other things, from refinancing. I don’t understand the logic.

  4. FHA loans have a streamline product. You can do an FHA streamline with or without an appraisal. FHA increases do not go into effect until April. There is still time to do one.

  5. Very few people consider making the switch to a conventional loan. The benefit is sometimes better. You have MI, but aren’t obligated for five years.

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