New FHA MIP Fee Small Potatoes

After April 1st, borrowers with new FHA loans will face higher mortgage insurance premiums (MIP). The increase is not huge but it falls under the category of "if you can avoid paying it, why not?"

Essentially what's happening on April 1stwith 30-year FHA loans is this:

If you borrow less than $625,500 and put down under 5 percent, your mortgage insurance premium will increase from 1.2 percent to 1.3 percent. Since most FHA borrowers take out mortgages which meet such criteria this is the change which will impact the most people.

Is a .1 percent increase a deal breaker?

With the FHA program, you get financing with as little as 3.5 percent down -- but to avoid the need for a big down payment you have to buy FHA insurance. The cost of FHA insurance is covered with an upfront mortgage insurance premium (you can even finance this) and an annual mortgage insurance premium. If we increase the annual insurance premium by .1 percent, the practical effect is the same as increasing the interest rate by that amount.

Say that you take out a 30-year, $100,000 mortgage at 3.5 percent. That's close to where mortgage rates are today and not far from historic lows.

In this example, the monthly principal and interest is $449.04. Increase the rate to 3.6 percent and the new monthly cost rises to $454.65. That's less than $6 a month.

So, no, the new increase is not a big deal and certainly not a deal breaker.

Not a deal breaker, but also not necessary

In fact, it's hard to look at the new mortgage insurance premium rates and think they are much more than political window dressing designed to assuage critics on Capitol Hill --because the FHA with its current MIP system is doing extremely well.

How well? FHA loans made during the past three years have racked up a $20 billion reserve surplus. The problem being faced by the FHA is not because its current loans or policies are terribly risky; it's because mortgages insured by the FHA between 2000 and 2008 created enormous losses and we're still paying off the damages.

Writing in The Hill newspaper, David Stevens, president and CEO of the Mortgage Bankers Association, says that the "data clearly shows that the loans that FHA has made in the last three years are among the best performing books of business the program has ever underwritten."

And on this one, he's right.

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