UPDATE January 20, 2017: Unfortunately, the Trump Administration cancelled this planned rate reduction!
There’s some great news for FHA home buyers. FHA mortgage insurance rates are changing in January 2017. The new reduced rates will save home buyers money every month!
What is Mortgage Insurance
Mortgage insurance typically applies to loans where the down payment is less than 20%. The insurance protects lenders if a buyer stops paying and the home goes into foreclosure. Lenders are unlikely to recover more than 80% of their investment, which is why that 20% down payment mark is commonly used. On FHA loans, there are two types of mortgage insurance. First, there’s an up-front premium paid at closing. There is also a monthly mortgage insurance premium for the life of the loan. The January 2017 change applies to the monthly premium.
FHA Mortgage Insurance Changes – The New Rates
The new rates could save home buyers several hundred dollars per month. FHA mortgage insurance rates are dependent on the length of the loan (term), loan amount, and down payment percentage. Let’s take a look at a typical first time home buyer in Massachusetts.
Most FHA buyers will opt for a 30 year loan. For loan amounts up to $625,500 and a down payment of 5%, the FHA mortgage insurance rate is changing from 0.08% to 0.055% per month. Buyers making the minimal down payment of 3.5% will see rates drop from 0.085% to 0.06%. On a $625,500 loan, that’s a savings of $156.37 per month. On a $400,000 loan, the savings is closer to $100/month.
Buyers obtaining jumbo loans receive even bigger savings. The mortgage insurance rate is dropping from 0.1% to 0.055% for low down payment loans and 0.105% to 0.06% for loans with down payments of 5% or more.
FHA Loans Qualifying for the New Rate
This rate change applies to loans disbursed on or after January 27, 2017. The date that the FHA case number was issued does not matter in this case. Sometimes, funds are disbursed on a different date than the actual closing date. The only date that matters in this case is the actual disbursement date. If you have a closing scheduled before January 27, 2017, contact your lender and real estate agent about possibly delaying that closing in order to receive the new rates.
Impact on Massachusetts Home Buyers
If you are currently on the market for a home and plan to use an FHA loan, you can feel good knowing that your monthly mortgage payments will be a little less. This can help you save for home maintenance costs or other unpredictable expenses. You can also ask for an updated pre-approval. Given the FHA mortgage insurance changes January 2017, you can qualify for a higher loan amount. This may help with bidding wars, which are still very common in the Greater Boston area.