15 Year Fixed Rate FHA Mortgage Loan to Become More Affordable

President Barack Obama signed into law H.R. 5981 on August 11^th 2010. H.R. 5981 was sponsored by Massachusett's Democratic Representative Barney Frank. The bill amends the National Housing Act in regards to mortgage insurance premiums. It authorizes the Secretary of Housing and Urban Development (HUD) to increase annual premium payments on FHA mortgages. It gives the Secretary of HUD the authority to almost triple the premium rates. How does this regulatory change make 15 year mortgages more affordable?

HUD announces decreases to upfront mortgage insurance premiums on all FHA loans no matter the term or Loan to Value (LTV). In a memo dated August 5^th, 2010, David H. Stevens, Assistant Secretary for Housing and Commissioner of the Federal Housing Administration, stated that the upfront mortgage insurance premium charged on FHA mortgages will be reduced to 1% of the loan amount on all mortgage terms. Currently the premium is 2.25% of the loan amount. For example, the one time upfront mortgage insurance charge on a $200,000 loan will be reduced from $4,500 to $2,000. The decrease in upfront mortgage insurance premiums will apply to all terms, whether 15 year or 30 year-affording both an upfront savings.

How, then, does a 15 year mortgage become more affordable with the new legislation? Remember that mortgage insurance paid by a borrower is not simply comprised of the upfront mortgage insurance premiums which as stated above will be decreasing. It also includes an annual mortgage insurance premium which is added onto the monthly mortgage payment. It is the upcoming increase in this annual insurance premium rates for FHA loans with terms greater than 15 years that will cause 15 year FHA mortgage loans to be the more affordable option for many consumers.

How will different Loan to Values (LTVs) and loan terms affect the annual mortgage insurance premiums increased by H.R.5981? Mortgage insurance on 15 year fixed rate FHA loans is only required on loans with loan to values above 90%, whereas mortgage insurance is required on all FHA mortgages with terms greater than 15 years regardless of the loan to value. The loan to value (LTV) is the amount of the new mortgage divided by the appraised value of your home. The annual mortgage insurance premium rate for a FHA 15 year loan with a loan to value above 90% is .25%. This is a much lower premium rate than the current 30 year which has a .55% cap now. The 30 year premium rate will likely go as high as .90% October 4^th and with the passage of H.R. 5981 could go up to a high of 1.55%.

To illustrate the law's impact, consider a $200,000 FHA mortgage loan and compare the upcoming changes in the annual mortgage insurance premium rates relative to different LTVs and terms of the loan.

Example 1:

Consider first a $200,000 FHA mortgage loan at 80% LTV or with a $250,000 appraised value.

15 year term. Remember that a 15 year term under 90% LTV does not require annual mortgage insurance-only the upfront mortgage insurance. A 15 year loan at 80% LTV will benefit from the decrease in upfront mortgage insurance and will not be negatively impacted by the increased annual rate.

Greater than 15 year term now = .5% premium or $83.33 mortgage insurance premium per month

Greater than 15 year term after Oct 4^th = .85% premium or $141.67 mortgage insurance premium per month

Greater than 15 year term maximum per HR5981 = 1.5% premium or $250.00 mortgage insurance premium per month

Example 2:

Consider a $200,000 FHA mortgage loan at 97% LTV or with $206,000 appraised value.

15 year term. A 15 year term on a loan with a greater than 90% LTV currently requires at least a .25% premium or $41.67 per month. This .25% premium rate remains unchanged on 15 year term loans with the upcoming legislation.

Greater than 15 year term now = .55% premium or $91.67 per month

Greater than 15 year term after Oct 4^th = .90% premium or $150.00 per month

Greater than 15 year term maximum per H.R. 5981 = 1.55% premium or $258.33 per month

What does this mean? When examining mortgage options for your next home purchase, refinance, or streamline refinance, keep in mind the cost of mortgage insurance premiums and their effect on your monthly payment. Upcoming changes to both upfront mortgage insurance charges and annual mortgage insurance premiums will make 15 year fixed rate FHA mortgage loans more attractive and affordable.

Sources:

Statement by the Press Secretary on H.R. 5872 and H.R. 5981

H.R. 5981

August 5th 2010 Special Edition Letter