FHA Mortgage Insurance Premium Cut by 0.5% – You Could Save $900 Annually

A new initiative by the Obama administration will benefit first-time homebuyers who take out FHA loans.  The administration has taken steps to reduce the annual mortgage insurance premiums on FHA loans to 0.85% from the current rate of 1.35% of the loan’s value. This FHA mortgage insurance premium cut of 0.5% will help first-time homebuyers save $900 a year on their mortgage insurance payments.

The Obama administration hopes that the move will provide a boost in home sales to first-time buyers, creating up to 250,000 additional sales over the next three years. Homeowners who refinance their home loans to FHA backed mortgages can also benefit from the rate drops. Administration officials estimate that FHA mortgage insurance premium cut could help up to 800,000 homeowners reduce their monthly insurance payments.

The FHA accounts for one-fifth of all new US mortgages and is a major source of home loans for first-time homebuyers. Since they are government backed, FHA loans carry much lower rates than traditional mortgages and require less hefty down-payments. Buyers with an FHA backed mortgage can purchase a home with as little as 3.5% down. Fannie Mae currently offers mortgages with as little as 3% down to qualifying buyers, but their annual insurance premium rate is currently 1.48% of loan value, which cannot compete with the new FHA premiums of 0.85% of loan value – even with the slightly higher down payment requirements the FHA loans end up being the overall cheaper option for first-time buyers thanks to the FHA mortgage insurance premium cut.

The move to cut insurance premiums comes as part of ongoing efforts by the Obama administration to encourage home ownership by making mortgages more accessible to working families, or as the White House puts it, “expand responsible lending to creditworthy borrowers.” In the months to come White House officials say they plan to take additional steps to “cut red tape and clarify lending standards”.

As usual, Congress remains sharply divided on the role of government initiatives to ease lending to first time buyers. Republican lawmakers were critical of the 0.5% reduction in mortgage insurance premiums, warning of future taxpayer bailouts in the event of borrowers defaulting on their FHA loans.

Mortgage and real estate industry insiders were buoyant at the news, however.  Current president of the Mortgage Bankers Association and former FHA commissioner David Stevens states that the drop in premiums gives “a psychological boost to Realtors, mortgage bankers, and probably a sizable number of homebuyers who are sitting on the fence.”

FHA Mortgage insurance premium cut