FHA Mortgage Costs — Up or Down?

by Peter G. Miller
August 23rd, 2010

There seems to be a considerable amount of confusion regarding the new FHA loan fees scheduled to start in October and how they will impact individual borrowers.

The Wall Street Journal headlines that “Red-Ink Fears Prompt Mortgage Backer to Raise Fees.”

The FHA, says the paper, “will raise annual insurance premiums to as high as 0.9% of the loan amount, up from 0.55%. For new borrowers, that would translate into an average monthly payment increase of $40. At the same time, it will drop the upfront premium that borrowers pay when they take out a mortgage to 1%, from 2.25%.”

Alternatively, you can see these numbers very differently.

To start, the changes are surely correct: Most new FHA borrowers will see the up-front mortgage insurance premium decline to 1 percent from 2.25 percent while the annual fee will go from .55 percent to as much as .9 percent.

But an increase of $40 per month? That will depend on how much you borrow.

For instance, if you have a $100,000 FHA loan, then the annual fee will go from roughly $550 in the first year to $900. That’s a difference of approximately $350 or $29.17 per month. However, the differential will shrink each year the mortgage is outstanding because the annual mortgage insurance premium (MIP) is pegged to the loan amount remaining each month. Since the loan balance is declining because of amortization it also figures that the monthly MIP cost is also slowly falling.

That said — and striving to be fair and balanced — if you’re going to say that the monthly MIP cost will increase (the fair part) you also might want to look at the savings from the reduction in the up-front MIP (the balanced part).

For the same $100,000 FHA loan the up-front MIP will fall from $2,250 to $1,000. That’s a savings of $1,250. If the loan lasts seven years — about the length of a typical FHA mortgage — then the borrower is saving $14.88 per month, on average.

Combine an increase of $29.17 in the first and most expensive year of the annual MIP with a monthly savings of $14.88 and you get a total increase of around $14.29.

Now you have to wonder: Is $14.29 a month a barrier of any sort in the context of a $100,000 mortgage? To be polite, if the borrower can’t put up the additional money then they should be borrowing a lot less or not borrowing at all.

In case no one has noticed, the economy has been demolished since 2007. It was in April of that year when home prices nationwide reached their apex, levels today which are 12.3 percent lower according to the Federal Housing Finance Agency.

It’s just silly to think that a mortgage insurance program could continue without change as the national economy nose-dived. It’s also silly to believe that costs are set in stone.

While the FHA mortgage insurance premium has risen by a minuscule amount, the real cost of financing has fallen through the floor. Just consider that in April 2007 the interest rate was 6.18 percent with .4 points versus today’s rate of 4.42 percent with .7 points. That’s an interest-rate drop of about 1.76 percent, $1,760 a year or $146.67 a month for a $100,000 mortgage. Overall it’s hard if not impossible to believe that financing costs overall have done anything but tumble.

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