Saturday, August 7, 2010

FHA Changes Coming

FHA, the federal agency that insures loans for millions of homeowners who have limited down payment, needs a cash infusion. FHA's reserves have been below the required level for several months, and they must figure out how to increase their reserves so they can continuing insuring loans. In July, 36% of the home buyers in Tucson who financed their purchase used FHA loans.

On October 4, 2010, FHA will be changing the Mortgage Insurance Premiums that they charge to borrowers using FHA financing. The Up-Front Mortgage Insurance Premium (UFMIP), which is added to the buyer's loan amount, will decrease from from 2.25% to 1.0%. On a $100,000 purchase, at the current 4.5% (!) interest rate, this will reduce the monthly payment by $6.11. So far so good.

The problem for home buyers is that the Monthly Mortgage Insurance Premium (MMIP) will increase from 0.55% to 0.80% or 0.90% annually. The exact amount hasn't been determined yet. If the MMIP goes to 0.9% annually, the net effect of the UFMIP and MMIP changes will be this: using FHA financing at current interest rates on a $100,000 house will cost $21.77 per month more.

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