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P-Day is here
On June 3rd, 2013 FHA made the Annual Mortgage Insurance Premium on every new mortgage permanent for the life of the loan in most cases.
If you already have a FHA mortgage, you don’t have anything to be worried about. This only applies for all new FHA case numbers on or after June 3rd, 2013.
Permanent for Most Borrowers
Previously, the annual mortgage insurance premium was required on all FHA mortgages regardless of loan to value for a minimum of 5 years, and until the original loan balance was paid down to 78% of the original appraised value.
The June 3rd mortgage insurance removal policy change pushes minimum number of years that you must keep mortgage insurance and completely removes the “paid down” to 78% loan to value trigger for removing the fee.
Mortgage Insurance Cancellation Changes
|<15 yrs||<78||5 years||11 years|
|<15 yrs||>78 – 90||Cancelled at 78% LTV||11 years|
|<15 yrs||>90||Cancelled at 78% LTV||Loan term|
|>15 yrs||<78||5 years||11 years|
|>15 yrs||>78 – 90||Cancelled at 78% LTV & 5 yrs||11 years|
|>15 yrs||>90||Cancelled at 78% LTV & 5 yrs||Loan term|
How Much Will This Cost Me?
There are two ways to look at this in terms of what it will ultimately cost you if you buy or refinance with a FHA insured loan after June 3rd, 2013.
Let’s start with a scenario where you intend to pay this mortgage completely off and will never sell the home or refinance the mortgage.
If you make normal payments on a $300,000 loan at 4% interest ($305,250 if you finance the upfront mortgage insurance premium), it will take you 130 months (10.83 Years) to reduce the principle balance to 78% where, under the old guidelines, your mortgage insurance would have been automatically removed by FHA.
On a 30 year (360 months) mortgage, the “cost” of permanent mortgage insurance would start once you’ve reached the 78% loan to value, leaving you with another 236 months of mortgage insurance at a current rate of $343.41 a month (1.35% of $305,250 loan amount).
The remaining 19.17 years left on the term of this mortgage will cost you $81,043.88
Buy or Refinance at 90% Loan to Value
If you absolutely must use FHA financing due to you being unable to qualify for conventional Fannie Mae financing at this time, mortgage insurance is only required for 11 years if you have 10% equity in the home.
“mortgage insurance is only required for 11 years if you have 10% equity in the home”
This isn’t nearly as costly as the above scenario.
This time, let’s assume a home value of $300,000 with 10% equity – if you’re financing the upfront mortgage insurance premium of 1.75% of the loan amount, you are now trying to pay down the remaining principle balance of so you have a loan amount of $274,725.00
Again, if you make normal payments, it will take you 89 months (7.42 years) to pay the principle balance down to 78%. With 10% equity, mortgage insurance will be removed at 11 years.
Under 95%, you annual mortgage insurance premium is 1.30% (as opposed to 1.35% above 95% LTV), so your monthly mortgage insurance payment on this 10% equity loan will be $297.62.
The remaining 43 months of mortgage insurance premiums will cost you approximately $12,797.00
Conventional Financing Alternatives
It is widely misunderstood that FHA insured financing is the only option for borrowers with less than 20% down payment or equity. This is absolutely not true.
Private Mortgage Insurance is a very affordable and available product that will save you tens of thousands of dollars over the options discussed above.
For more information, here is more information about FHA mortgage insurance alternatives