Well this didn’t take long and after President Trump was in office for less than 1 hour the White House Suspends FHA MIP Reduction (Mortgage Insurance Premium). If you haven’t read my article on the FHA MIP reduction and the positive affects it was going to have for homeowners, you need to read it here. On January 9th the Obama administration put into place that on January 27th FHA Mortgage Insurance Premiums would be reduced 25 points on an annual basis from 0.85% to 0.60%. Now FHA Mortgage Insurance Premiums are calculated on the loan amount being multiplied by 0.85% and then getting paid over 12 months via the escrows in your mortgage payment. For example, if you have a $200,000 loan, your current FHA MIP is $200,000* 0.85% or $1,700 giving you a monthly premium of $142. Now under the proposed reduction to 0.60% you would now only pay $1,200 per year or a savings of $500 annually or $42 per month.
Now, the proposed legislation to reduce the FHA MIP was not something put together at the last minute, but a calculated approach to lessening the financial burden for people looking to refinance their FHA Loans. It should be known first of all that in order to get the reduced rate, you would need to either purchase a new home via FHA Loan or you would have to refinance your current loan to obtain these new rates. The reason why a refinance would easily happen is because you have to show a tangible benefit to refinance your FHA Loan and monthly savings due to an FHA MIP reduction is an easy way to satisfy those guidelines. When the White House Suspends FHA MIP Reduction they are stating that they are going to need some time in order to evaluate the recent years of the housing market to determine this truly is a benefit to the people. Well the fact of the matter is the proof is in the pudding so to speak and as loan volumes have increased and foreclosures have decreased, this only means that reserves have been building from high rates of FHA MIP. For example, in the years following the Great Recession the FHA MIP rate was 1.35% annually with 1.75% paid up-front upon closing of the loan. In 2015 this was reduced to 0.85% annually and 1.75% up-front and the new proposed rules wanted 0.60% annually and 1.75% up-front. Let’s illustrate these amounts below using a $200,000 loan as an example:
Over the past 5 years, the up-front FHA MIP percentage was 1.75% and for arguments sake let’s say that there was $500,000,000 in FHA Loans made in that time which is extremely low, there would be $8,750,000 in up-front premiums paid and nearly $6,750,000 paid annually in premiums that goes into the reserves for FHA MIP. As foreclosure rates have gone way down over the last 5 years, the need for large amounts of reserves has also diminshed.
With reserves at a more than adequate amount, the reduction in FHA MIP was designed to help more borrowers gain access to obtaining mortgages as mortgage rates surged after the Presidential Election. With buying power being cut by the week, this was a way to enable the public to keep their pre-election buying capability. In a time where interest rates aren’t starting to come down nearly as fast as they have increased, any little bit to help the borrowing public would help, but with these recent actions, that is not the case.
Even though the White House Suspends FHA MIP Reduction, we can still hold out hope that after the new regime evaluates the status of the FHA Reserves, they will agree with the MIP rate reduction and give it back to the public. However, the longer we see a delay in evaluating and acting on this proposed rule change, the more probable it is that the rate reduction never takes place. We can wait and see what happens, but something needs to happen quickly. Just because this was delayed, doesn’t mean you should hold off purchasing a home. If you are looking to purchase, refinance, or obtain a pre-approval for your home shopping needs, then you need to reach out to me immediately at 888-900-1020 and we can get your process started!