HUD announced that it is lowering the annual mortgage insurance premium (MIP) on FHA loans that close on or after January 27, 2017. Lowering the annual FHA MIP reduces the ongoing monthly cost for borrowers with FHA mortgages and makes the FHA program more competitive with other low down payment mortgage options such as the HomeReady Mortgage Program.
The new FHA MIP rates represent a significant reduction relative to the prior rates, enabling borrowers to reduce their total monthly housing expense which makes owning a home more affordable.
The annual FHA MIP rate depends on loan term, mortgage amount and loan-to-value (LTV) ratio with the new FHA MIP ranging from .55% to .60% of the loan amount for mortgages with terms longer than 15 years. This compares to prior FHA MIP rates of .80% to 1.05% of the loan amount for for mortgages with terms longer than 15 years.
For example, for a $250,000 30 year fixed rate loan with a loan-to-value (LTV) ratio of 96.5%, the annual FHA MIP based on the new rate (.60% of the loan amount) is $1,500 or $125 per month. This compares to $2,125, or $177 per month, under the previous FHA MIP rate (.85% of the loan amount).
For mortgages with terms of 15 years or less, the new annual FHA MIP ranges from .25% to .50% of the loan amount as compared to the prior FHA MIP rate of .45% to .95% of the loan amount.
The annual FHA MIP is also reduced for certain loans under the FHA Streamline and Simple Refinance programs.
Although the upfront FHA MIP fee remains unchanged at 1.75% of the loan amount for most mortgages, the reduction in the ongoing annual MIP is a significant boost for prospective home buyers who lack the funds to make a significant down payment. Combined with the increase in FHA loan limits for 2017, the lower annual FHA MIP should make home ownership more attainable for more people.
The timing of the HUD announcement created a stir as this is likely the last major housing policy announcement before the new administration takes over. It will be interesting to see if HUD secretary nominee Dr. Ben Carson accepts the new rates or implements his own changes to the FHA Mortgage Program and MIP fees.
FREEandCLEAR will keep you abreast of any developments and provide the tools and resources to understand how FHA policy changes impact mortgage borrowers.