FHA Could Be More Expensive

FHA loans are popular because of the 3.5% down payment but they will be more expensive for buyers in the near future. Starting on April 1, 2013, the mortgage insurance premium will go up by .1% to 1.35% which may not even be noticeable to most would-be homeowners. But the staggering increase that follows in the coming months could put a damper on FHA's desirability.

The biggest increase will occur on June 3, 2013 when FHA's policy on the duration of the required mortgage insurance will be increased for the life of the mortgage. Going lifetime basically doubles the amount of total MIP, mortgage insurance premium if the loan is paid to term.

Example: Purchase Price $175,000 with 3.5% down payment at 4% mortgage rate on 30 year term
	Present	After 6/3/13
MIP duration	78% of original loan	Life of mortgage
Cumulative premium	$20,838.24	$42,447.93

Presently, the MIP is required for approximately 9 years 9 months with normal amortization. The new program would require the MIP for the life of the loan. In this example, the initial monthly MIP is $196.88 which decreases based on amortization.

There are buyers that qualify on income and credit who may not have the necessary additional down payment required for 80% and 90% conventional loans. The 3.5% FHA program has provided a great vehicle to get into a home with a minimum amount of cash.

For homeowners who anticipate staying in their home for ten years or less, the new changes might not have much financial impact. However homeowners who expect to be in their home longer can refinance with a conventional loan without mortgage insurance once the equity has increased due to amortization and appreciation.

For buyers to avoid these increases, they will need to act now to get the FHA commitment issued prior to these change dates.