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FHA Upfront Mortgage Insurance Premium Increases April 5th, 2010 – Pay Now, Save More Later!

Ok, I get it – the Up Front Mortgage Insurance Premium (MIP) is increasing from 1.75% of the loan amount to 2.25% of the amount.

It is not often explained by Lenders, but you can pay the up front premium, well, up front.  You are not required to include it in your loan amount.

Often this option is not even discussed with you because of the fear of the closing costs being higher than the next lender – but let’s take a real black and white look at how this calculates out to be a very expensive decision that you may not have been given the opportunity to make on your own.

This is the challenge that I have with “professionals” that simply tell you what they are going to do for you instead of educating you about all of your options and allowing you to make informed decisions….ok, no rants in this post….(note to self) I will save that for another day…let’s continue, shall we?

Let’s take a look at an example where the purchase price is $300,000.

Scenario 1 – Finance Upfront Mortgage Insurance Premium

  • Purchase Price : $300,000
  • Down Payment: 3.5% or $10,500
  • Base Loan Amount:  $289,500
  • UFMIP: 2.25% of Starting Loan Amount or $6,513.75
  • NOTE: Any amount less than $1.00 will not be financed.  In this example, $.75 will be moved to closing costs
  • Financed Loan Amount (inc UFMIP): $296,013.00

Scenario 1 – Loan Term & Payment

  • Financed Loan Amount (inc UFMIP): $296,013.00
  • 30 Year fixed rate mortgage
  • 5.5% – Interest rate (not accurate rate – for example purposes only)
  • $1,680.66 – Monthly Payment not including taxes, insurance or monthly mortgage insurance

Scenario 2 – DO NOT Finance Upfront Mortgage Insurance Premium

  • Purchase Price : $300,000
  • Down Payment: 3.5% or $10,500
  • Base Loan Amount:  $289,500
  • Financed Loan Amount: $289,500

Scenario 2 – Loan Term & Payment

  • Financed Loan Amount: $289,500
  • 30 Year fixed rate mortgage
  • 5.5% – Interest rate (not accurate rate – for example purposes only)
  • $1,643.75 – Monthly Payment not including taxes, insurance or monthly mortgage insurance

Ok, I know you’re not hopping mad over having to pay only an extra $36.91 a month difference in your monthly mortgage payment….but let’s take a another look at this.

Instead of paying an extra $442.92 a year, let’s say you invested that same $$36.91 a month into an S&P 500 Index Fund with an average annual rate of return 9% compounded annually.

Let’s take a look at what this investment would look like – I used the compound interest calculator at moneychimp.com for these screen shots

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Now add to this the $442.92 a year that you are paying because you financed your Upfront Mortgage Insurance Premium and you’re looking at a net GAIN to your family’s financial health of $5,401.41 and $12,812.64 respectively.

Listen, I understand that not everyone has an extra $6000 plus lying around to pay this Mortgage Insurance as a closing cost as opposed to financing it but at least now you’re empowered with the option to do so.

Looking for funds to help cover closing costs, upfront mortgage insurance premiums and down payment?  Read the article I wrote about Assistance with Down Payment and Closing Costs and some of the creative ways to use these funds.

It is always my goal to make you ask more questions and to put you in control of your financial decisions.  Does this help?

Let’s have a conversation – submit questions and comments below – I want to know if this is the kind of thing that empowers you.

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