Recently, the Federal Housing Administration (FHA) made a change to its premium pricing structure: lowering the upfront premium amount from 2.25% to 1% and raising its monthly premium from .50% to .85% for 30-year loans with 5% or more down and from .55% to .90% for 30-year loans with less than 5% down. This change has made some people anxious and others just don’t care. What does this change mean to today’s homebuyers? Is this a good change or not?
Well, that depends. For borrowers with lower credit scores, an FHA loan may continue to be the best option. For borrowers with higher credit scores, private mortgage insurers offer cheaper alternatives.
Even FHA commissioner David Stevens said, in an article that appeared in the National Mortgage News on September 27, 2010, “We have actually made GSE loans with private mortgage insurance a better option for some homebuyers.”
Private mortgage insurance (MI) has become a better option because private mortgage insurance companies have made changes, too. In response to the housing and economic downturn many private companies, including mortgage insurers tightened, however, as the economy began to recover most have spent the majority of 2010, opening up markets and normalizing guidelines and some have altered their pricing . The result is private MI options that are competitive with FHA, especially for borrowers of credit scores of 720 or higher.
Here are 6 things you need to know about the Monthly MI premium plan offered by private MI insurers:
- No upfront premium: While all MI companies offer premium plans that allow for an upfront premium, the most popular premium structure by far in the industry is the Monthly MI plan where no upfront payment is needed. Borrowers choosing an FHA loan must either pay an additional 1% at closing or finance the amount into their loan.
- Lower loan amount: Most FHA borrowers choose to finance that upfront premium into the loan and spread it over the life of the loan, increasing their debt. With a private MI Monthly premium, there is no upfront premium and no need to increase the loan amount.
- Greater equity: Because there was no upfront premium to finance into the loan with a private MI Monthly premium, the borrower is put in a better equity position right from the start.
- Lower or comparable monthly payment: Here is where homebuyers and real estate professionals should rely on a professional loan originator, because several variables will come into play, especially the borrowers’ credit scores.
For instance, at MGIC, the leading private mortgage insurance company, a borrower with a 720 credit score and 5% downpayment will pay a monthly premium rate of .67%, compared to FHA’s premium rate of .85% for a borrower with the same score and downpayment. But remember that FHA also charges a 1% upfront premium! So it’s important to “do the math” to see which option is actually better for the borrower. In many cases, going the private MI route results in a lower monthly payment, compared to FHA.
- Lower total MI cost: Because there is no upfront premium and often a lower monthly premium, the amount paid for mortgage insurance can be dramatically less with private MI compared to FHA. For example, on a $150,000 loan where the borrower put 5% down and had a credit score above 720, the borrower will pay more than $2,500 more in MI costs over 3 years with FHA compared to MGIC’s Monthly MI.
- Cancellation: Fannie Mae and Freddie Mac have more flexible rules for cancellation than FHA, meaning a homebuyer using private MI may be able to cancel the monthly MI payment sooner than with FHA, saving even more money over the life of the loan.
It’s obvious that checking out all the options can really pay off for savvy lenders and homebuyers. To find out which is the better option, all the MI companies provide calculators that allow originators to compare FHA and private MI premium plans. (MGIC’s calculator is located at: www.mgic.com/calculator)
Cecilia Farley – MGIC
Cell (503) 869-5732
MGIC (www.mgic.com), the principal subsidiary of MGIC Investment Corporation, is the founder and leader of the private mortgage insurance industry, serving more than 3,300 lenders with locations across the country and Puerto Rico.
- Mortgages: F.H.A. Rule Changes for Mortgage Borrowers (nytimes.com)
- Readers’ questions on whether to prepay mortgage (sfgate.com)
- Mortgage Insurance Premiums (themortgagepot.com)
- Renovation Financing: Homepath Renovation Vs. FHA 203K Streamline! (zillow.com)
- FHA Loans In Arizona: What Fees Come With an FHA Loan? (azmortgageguru.com)
- Getting A Government-backed FHA Loan: The Steps (azmortgageguru.com)
- FHA 2010 Mortgage Guidelines (brighthub.com)
I have also heard that there is an option to pay a lump sum for MI upfront and not have monthly MI payments. So instead of a Seller contribution going towards closing costs, you can use this contribution to buy out your MI. I have not actually done this, but I would welcome any feedback on the subject. Thanks.