There’s been speculation pretty much ever since the last cut that the FHA would lower insurance premiums once more.
And the rumor mill has been really busy the past few weeks, signaling a possible cut in the next month or so.
The latest rumor comes via a bulletin from Inside Mortgage Finance, which revealed that industry chatter points to a 25 basis point cut in FHA premiums after the presidential election in early November.
That means the typical FHA borrower who puts down 3.5% and takes out a 30-year fixed mortgage will pay an annual MIP of 0.60%.
The decrease would return annual premiums to just above their pre-crisis levels of 0.55%, which would make perfect sense given the fact that we are now well beyond the most recent crisis and back to square one for the most part.
In case you haven’t been keeping score, the FHA’s annual MIP was 1.35% before the 50 basis point drop in early 2015.
Actually, it was as high as 1.55% if you had a loan amount above $625,500 and an LTV north of 95%.
But this rumored change will bring things back down to earth.
The argument for the change is that the FHA’s Mutual Mortgage Insurance Fund has been beefed up thanks to the higher premiums collected over the past few years and lower mortgage defaults during that span.
Is It Enough to Justify a Refinance?
While the change will be welcome news to most, it may not sway the decision to refinance.
The 25 basis point change on a $200,000 loan would amount to annual savings of roughly $500.
Currently, such a borrower would be paying about $142 per month in MIP costs. It would drop to $100 with the change.
The problem with FHA is the upfront MIP, which is set at 1.75% and probably not going to change.
If you refinance from an existing FHA loan into another FHA loan, you might be entitled to a partial refund of the upfront premium if the loan isn’t older than 36 months.
If you can snag a lower mortgage rate in the process, the argument is a lot more compelling. For some, just paying a lower MIP might be enough, assuming their loan isn’t very old and much of the upfront premium can be recouped.
Another problem with FHA loans these days is the fact that mortgage insurance is in force for the life of the loan, instead of just the first five years or once the LTV drops to 78%.
That’s why it often just makes sense to refinance out of the FHA and into a conventional loan if your LTV dips to 80% thanks to recent home price appreciation. You can avoid the mortgage insurance entirely and get a similarly low interest rate.
FHA Premium Cut Is Good News for New Home Buyers
Of course, the change will be great news for those looking to purchase homes with FHA financing.
As noted, savings of nearly $50 per month for relatively small loan amounts is nothing to sneeze at. And it just gets better as your loan amount rises.
Aside from the savings, it could help more borrowers qualify with lower monthly payments that could push the all-important DTI ratio to acceptable levels.
It will also make the case for an FHA loan vs. a conventional loan more interesting. You’ll still have to do the math to see which type of loan is best for your situation.
And remember, this is just a rumor. It’s not fact yet. But if it does happen, it’s supposedly going to take place after the election. Of course, the decision could be swayed by the outcome.