The Federal Housing Administration has increased insurance fees five times since 2008 which is starting to overshadow the lowest FHA mortgage rates in history. Despite the benefits of FHA, other mortgage programs may be worth considering.
— Effective June 3rd, 2013, announced from FHA Mortgagee Letter 2013-14.
Climbing MIP Rates Overshadow the Lowest FHA Mortgage Rates in History. FHA mortgage rates are falling below 3.50% on average nationwide, according to Federal Housing Administration data. However, as FHA mortgage rates make lifetime lows, the effect of rising mortgage insurance premiums (MIP) is canceling out the positive effects for home owners.
The Connection between the FHA and Mortgage Rates:
- The Federal Housing Administration is not a mortgage lender, nor does it "set" FHA mortgage rates. Rather, it's a government agency which insures mortgage lenders against losses on loans meeting specific minimum standards. This set of minimum loan standards is commonly called the "FHA mortgage guidelines".
- Banks and mortgage companies use this set of guidelines to underwriter mortgage loans and approve them to be insured by the FHA. Loans which meet FHA minimum standards, are eligible for a FHA mortgage. For these loans, banks provide mortgage rates based on the going price of a Ginnie Mae (GNMA) mortgage-backed security (MBS). A mortgage-backed security is a bond openly traded via Wall Street.
- Despite having little influence over today's FHA mortgage rates with its role as a mortgage insurer, the Federal Housing Administration still affects the monthly cost of using FHA financing for home owners. This is because the agency charges home owners a monthly mortgage insurance premium, similar to PMI on conventional mortgages without 20% equity.
- FHA MIP can add up to 1.55 percentage points to "effective FHA mortgage rate" on an annual basis.
- Effective FHA Mortgage Rates are becoming 44% Higher. The FHA is a government agency which, by law, is required to maintain $2 in its Mutual Mortgage Insurance (MMI) fund for each $100 insured. The MMI is the agency's "cash reserves" or the account from which insurance claims are paid.
- The Federal Housing Administration has raised its premiums 5 times since 2008 in order to keep its Mutual Mortgage Insurance fund flush with cash and, each time the MIP has climbed, the "effective" mortgage rate of an FHA-backed loans climbed with it negatively affecting home owners. The effective FHA mortgage rate paid is the actual FHA interest rate from the lender, plus the annual rate of insurance charged by the government agency.
The FHA most recently raised its mortgage insurance rates April 1, 2013, lifting annual mortgage insurance premiums to as high as 1.55%. This is up from .55% only a couple of years ago which is a staggering 281% increase in costs. This jump in fees offsets the effects of the lowest FHA mortgage rates in a lifetime.
FHA Streamline Refinance allows Lower Effective Rates. The good news is that some FHA-insured home owners are exempted from rising MIP by refinancing with the FHA Streamline Refinance. As long as their current loan was endorsed on or before May 31, 2009 they will pay just 0.55% in annual MIP.
In order to meet FHA Streamline Refinance requirements, current FHA-backed homeowners prove the following:
- At least 6 mortgage payments have been paid.
- No more than one 30 day late payment in the past 12 months.
- There is a "net tangible benefit" to refinance.
For homeowners meeting FHA Streamline Refinance standards, the mortgage approval process is simplified. No appraisal is required, which means that underwater mortgages are eligible. There is no verification of income or employment which allows loans to close quickly.
Remaining Benefits of FHA mortgages
Following the subprime mortgage meltdown, low down payment home buyers have been utilizing FHA mortgages because of low rates and high loan-to-value guidelines compared to conventional loans. The flexibility and expanded eligibility allows for more home owners to purchase homes. Though the benefits are numerous, it may be worth reviewing loan options. As FHA fees have increased, the benefits for FHA financing are diminishing. A fair comparison should be made between FHA loans and the Conventional 97 program. Overall, FHA loans have lower rates but can get expensive with the FHA’s new fees.
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