MIP or PMI? The choice grows more difficult
The choice between a Federal Housing Administration (FHA) loan with upfront and annual mortgage insurance premiums (MIP) and a conforming loan with private mortgage insurance (PMI) is about to become more difficult for borrowers now that the FHA has announced some significant changes to its pricing and cancellation policies.
Lower FHA mortgage insurance premiums
Starting in late January 2017, and for loans with terms of 30 years, the annual MIP is set to decline by 25 basis points (0.25 percent) for all borrowers, but MIP costs will still differ depending upon the size of the borrower's down payment. Loans with less than 5 percent down will see a 0.60 percent annual premium; loans with greater than a 5 percent down payment will see a 0.55 percent one.
The FHA also announced that is will no longer charge different fees based upon the size of the loan, so these premium factors will remain in place for amounts up to the FHA's maximum loan limit for the area. In high-cost counties, this can be as much as $636,150.
The annual premium decrease amounts to a reduction of about $31 per month for a $150,000 loan, according Lemar Wooley, a spokesperson at the U.S. Department of Housing and Urban Development. Stated another way, 10 basis points equals $10 for each $100,000 of the loan amount.
Neena Vlamis, president of A and N Mortgage Services, a mortgage company in Chicago, offers this example:
- Purchase price: $250,000
- Down payment (3.5 percent): $8,750
- Loan amount: $241,250
- Annual MIP per month at the old 0.85 percent rate: $171.89
- Annual MIP per month at the new 0.60 rate: $120.63
The difference of about $51 per month doesn't improve a buyer's purchasing power all that much, but every little bit helps, according to Keith Gumbinger, HSH.com's vice president. "With home prices rising and mortgage rates up from rock-bottom lows, any reduction in costs can help borrowers improve their chances of getting a home," he says.
Paying for the life of the loan
Although MIP costs are now much more in line with PMI costs, the FHA program still has a drawback: Unlike PMI, FHA mortgage insurance can never be cancelled for any loan that starts with less than a 10 percent down payment. This is a policy that has been in place for several years, and is a consideration when choosing between a conventional mortgage and an FHA-backed one.
Cancellation of the MIP is possible for older loans that were originated before June 3, 2013 and for loans that begin with a 10 percent down payment or more. However, even if you do make that large of a down payment, you'll still be required to pay the MIP for at least 11 years. Other than this, the only way to stop paying the MIP is to pay off or refinance out of the FHA program.
The inability to cancel FHA mortgage insurance as quickly doesn't affect whether you can qualify for a loan, but can make your loan more costly over the long term.
This increased insurance cost might prompt more borrowers to choose a conforming loan instead of an FHA loan, says Julian Hebron, mortgage consultant at RPM Mortgage, a mortgage company in San Francisco.
While FHA mortgage rates typically are lower than conforming mortgage rates, a conforming loan could turn out to be cheaper than an FHA loan since PMI can be canceled sooner, Hebron says.
For conventional mortgages with PMI, "It's at the discretion of the servicer as to when the PMI goes away, but traditionally it's between two and three years that you're eligible for review, if you've achieved 22 percent equity by pay-down," Hebron says.
Terms and conditions
The premium increase and stricter cancellation policy apply only to new loans, so current FHA borrowers will not be affected. Certain FHA streamline refinance loans, those with original dates before May 31, 2009 with original terms of less than 15 years will also see a premium decrease.
The FHA's upfront MIP of 1.75 percent is not changing.
The best way to really know whether an FHA loan with upfront and annual MIPs or a conforming loan with PMI is a better choice for you is to crunch the numbers. You can start by plugging some figures into HSH.com's mortgage calculator or PMI cost calculators. You should also consult a mortgage professional to compare these loan products based on your personal financial situation.
More help from HSH.com
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