FHA mortgage insurance might get cheaper this year
“Mortgage industry abuzz with speculation of FHA MIP cut,” stated one trade magazine on January 28. And that journalist was right.
Many insiders are confidently predicting a big cut in the Federal Housing Administration’s (FHA’s) annual mortgage insurance rates.
FHA borrowers currently pay 0.85% annually in mortgage insurance premiums (MIP). That’s $1,700 per year, or $140 per month, on a $200,000 mortgage.
So it’s no wonder a possible MIP rate cut is big news. It could help new home buyers and refinancing homeowners save big on their housing payments.
Why experts think Biden will lower mortgage insurance premiums
Lowering FHA mortgage insurance rates isn’t a new idea from President Biden. It’s a holdover from former President Obama’s agenda.
American Banker magazine explains “The Department of Housing and Urban Development under former President Barack Obama had announced a scheduled 25-basis-point [0.25%] reduction in the FHA’s annual mortgage insurance premiums just before President Donald Trump took office.”
But Trump reversed this change at the start of his term, leaving FHA MIP rates at 0.85% per year.
Now, says American Banker, “observers expect the Biden administration to follow through on that 25-basis-point cut and potentially go even further.”
Lowering FHA MIP costs would be right in line with President Biden’s goals of expanding affordable housing opportunities for low- and middle-income families.
Of course, this is only speculation for now. No official announcements have been made.
But the pervasiveness of the rumor — and the absence of denials from the administration — mean a change seems likely.
So potential home buyers and FHA homeowners should be aware of what the (potential) change would mean for them.
What an MIP reduction could mean for you
There’s good news and bad news.
The bad news is that if you already have an FHA loan if and when the reduction takes effect, you won’t see any savings. You would have to refinance into a new FHA loan to see the reduction.
The good news is that if you haven’t applied for an FHA loan yet if/when the cut is announced, you can likely take advantage of the new, lower fees.
But just how much would home buyers and refinancers stand to save?
A 25-basis-point reduction means MIP rates would fall by 0.25%. So you’d be paying 0.6% of your loan balance each year instead of the 0.85% that nearly all FHA borrowers now pay now.
These mortgage insurance rates are calculated annually but charged monthly.
Example: 0.25% MIP rate cut
Let’s say you plan to borrow $200,000 with an FHA loan. Your MIP rate at current levels would be 0.85%, making an annual charge of $1,700 — or $140 per month.
Now let’s assume the new MIP rate falls to 0.6%.
Your annual charge tumbles to $1,200. And your new monthly MIP cost would be exactly $100 per month.
That’s a saving of $500 a year, which few of us would sneeze at. But there’s a possibility that the savings could be even bigger.
Example: 0.50% MIP rate cut
American Banker wondered whether the Biden administration might “potentially go even further.”
So how does the math work if annual MIP rates were to be cut a little more — to 0.5%?
Assuming the same $200,000 loan, a 0.5% rate would reduce the annual payment to $1,000. And that would make the monthly payment just $83 versus $140 per month at current levels.
That would save you $700 a year over your current payment.
Rates haven’t changed yet…
Remember: this is just speculation. Unless and until an official announcement is made, you should continue to budget for your full, existing 0.85% MIP rate.
But if you’re considering a home purchase or refinance later this year, you should keep an eye out for news from the Department of Housing and Urban Development (HUD).
If a change is announced, it could be worth waiting on that application until you can secure the lower rate.
What happens to existing FHA loans?
Homeowners with an existing FHA loan may not benefit from lower mortgage insurance premiums right away.
An MIP rate reduction likely would not change the terms of your current mortgage.
So if a change is announced, you’d have to refinance into a new FHA loan to take advantage of MIP savings.
Keep Streamline Refinancing in mind
The good news is that FHA borrowers may well be in line for an FHA Streamline Refinance — a simplified, low-doc refi program.
FHA Streamline loans typically come with minimum paperwork, low costs, and no credit check. You likely won’t need a new home appraisal or income verification.
However, you’ll have to pay closing costs yourself — only the upfront mortgage insurance charge can be rolled into the loan balance.
And cashing out is not allowed with the FHA Streamline program. If you want cash-back with your refinance, you’ll need the FHA cash-out loan, which requires full underwriting.
How the MIP cut could contribute to the FHA Streamline “net tangible benefit” rule
Right now, FHA Streamline Refinances have a requirement that you gain a ‘net tangible benefit’ (some clear monetary advantage) as a result of using one.
This typically means you need to lower your ‘combined rate’ (mortgage interest plus mortgage insurance) by at least 0.5%.
Say the Biden administration does cut MIP rates by 0.25%. Under the current rule, you’d also need to lower your mortgage interest rate by 0.25% to be eligible for Streamline Refinancing.
But with rates trending downward through 2020 and into 2021, it’s quite likely that a 0.25% reduction is in reach.
But do keep in mind that your current FHA loan has to be at least 210 days old before you’re allowed to refinance.
When could the change take place?
Some mortgage industry insiders are expecting an announcement during President Joe Biden’s first 100 days in office. And they may be proved right.
But there’s a reason we rarely quote speculation from mortgage industry insiders. They’re often wrong.
And the fact is, nobody outside the government knows whether there will be an announcement at all, let alone its likely date. Which raises an important question: What are you supposed to do with this information?
What are you supposed to do with this information?
We wouldn’t be sharing this speculation with you if we didn’t think there was a good chance of the rate cut really happening. But there’s no guarantee it will.
So you probably shouldn’t change immediate plans to purchase a home or refinance.
Today’s FHA mortgage rates are at historic lows — and your interest rate has a much bigger impact on your total loan cost than your mortgage insurance rate.
If you wait on a rate cut and miss today’s low interest rates, it could negate your savings. You could also risk losing out on your dream home by waiting for financing.
Keep in mind, you only need to wait 210 days — about 7 months — from your FHA home purchase or refinance before you can refinance again.
If Biden does cut MIP rates, the change will be long-term. So you can always refinance if it makes financial sense for you to do so later on.
Will other aspects of FHA loans change?
Most people who opt for an FHA loan do so because it’s the easiest, most affordable path to homeownership that’s open to them.
American Banker describes FHA borrowers as, “traditionally first-time homebuyers and largely minorities and lower-income earners.”
And they choose FHA loans because they can get approved with lower credit scores and higher existing debts than Fannie Mae, Freddie Mac, and other conventional loans usually allow.
None of that’s likely to change if the Biden administration comes through with the rumored changes.
The only difference should be the amount these borrowers have to pay for their annual mortgage insurance.
Remember, there’s also an upfront mortgage insurance (UFMIP) fee equal to 1.75% of the loan amount. Most borrowers roll this into their loan balance so they don’t have to pay it at closing.
So far, we haven’t heard talk of the UFMIP rate changing — only the annual mortgage insurance premium of 0.85%.
The bottom line
An FHA MIP reduction would be a great win for borrowers, helping to keep monthly housing costs low.
If you plan to buy a home or refinance via an FHA loan later this year, there’s a good chance you could see lower mortgage insurance premiums.
But if you’re already in the process of buying or refinancing, we don’t recommend waiting on news of lower MIP rates. You’re likely to see bigger savings by taking advantage of today’s ultra-low mortgage rates.