Mortgage insurance on the rise but will it effect the market?
Beginning on April 10, 2012, insurance rates for the federal housing administration (FHA) mortgages have increased from 1 percent to 1.75 percent, which will lead to a slight increase in the amount that home buyers will be paying.
This is the fourth FHA borrowers’ increase in the last three years. The change was created to bring in more than a billion dollars to the federal government by September of this year. This will cause some impact on the actual home buyer, however, particularly those who are buying homes for the first time, as they are the ones who are the most likely to look to the FHA loan programs because they need low down payments.
The combination of the additional up-front fee and the increase to the annual (and therefore monthly) payments will likely not be large enough to make a difference between the ability to purchase a home or not, but it is an additional hurdle which must be faced at a time when individuals are already struggling with tightening their belts.
For a $200,000 loan, for example, this would increase the monthly payments by about $24. For that same loan, borrowers can expect to pay an up-front premium of an additional $1500. Moreover, because of the payroll tax cut, the annual premium will rise by 10 basis points, which won’t lead to a tremendous impact, but will be an additional struggle for those who are trying to buy while taking advantage of a program that is designed to assist when they cannot make a large down payment.
This comes just in time for the spring buying season and at a time when the mortgage rates have fallen over the last few days. For this reason, though the applications at the FHA which may have fallen as a result of this recent announcement, they will likely be offset by the low mortgage rates.
Homes are also highly affordable right now, so this remains an opportunity for buyers. Equally, though people haven’t been buying houses because they don’t have a down payment, among other reasons and uncertainties.
According to Greg McBride, senior financial analyst at Bankrate.com, a unit of Bankrate Inc., this interest rate increase will certainly “boost the coffers of the FHA”, which is good for taxpayers as the FHA reserve fund has been depleted over time and it has been costing tax payers more money. He doesn’t feel that it’s a game changer for the housing market, which already has “plenty of headwind” and therefore he doesn’t feel that this will make a “material difference”.