Mortgage Costs Go Lower with New FHA Loan Rules
The Federal Housing Administration will reduce its annual mortgage insurance premiums from 1.35 percent to 0.85 percent beginning January 26, giving this year's homebuyers more purchasing power with a lower mortgage payment each month. This reduction also applies to current homeowners who refinance with an FHA loan.
Mortgage insurance premiums are based on the amount of the loan. For example, if you took out an FHA loan of $300,000 last year you would pay $4,050 in private mortgage insurance (PMI) each year. That same FHA loan of $300,000 taken this year would require the buyer to pay just $2,550 for private mortgage insurance annually. In this scenario, the total mortgage payment would be reduced by $125 per month—an annual savings of $1,500.
"There are individuals and families in our communities who have the funds to buy a home and have the strong credit ratings to support it, but the rigid lending practices of banks today have shut out these people," says Michael McKenna, senior vice president and chief operating officer of WEICHERT, REALTORS® – New Colony.
"Strict lending requirements are a good thing, so we can avoid another housing bubble and bust, but there's this group in the middle who are qualified who haven't been able to buy. This change in FHA private mortgage insurance premiums will make homeownership a possibility for more people and allow others to purchase larger homes," McKenna says.
Nationally, these lower premiums are expected to help more than 800,000 homeowners save on their monthly mortgage costs and enable up to 250,000 new home buyers to purchase a home.
These changes will have several positive impacts on the Maryland real estate market as well, according to Scott Berngartt, a senior loan officer at the Ellicott City branch of George Mason Mortgage, LLC.
"With the reduction in the mortgage insurance, a lot of potential buyers will get off the fence and buy more quickly," Berngartt says. "We will see the spring market start much sooner than April this year, maybe even the end of January or beginning of February as a result of this change."
Berngartt expects that houses in all price ranges will be effected by this change as the new FHA loan limit is now $517,500, up from $494,500 in 2014. "We will see both first-time homebuyers getting into the market and secondary buyers looking to move up as well. This coupled with a recent reduction in interested rates gives buyers everything they are looking for to make a decision now and not put off the purchase until later in the year."
As the demand to buy what is already on the market goes up, inventory will be reduced and in turn values will increase, explains Berngartt. "Hopefully then we will see sellers get back into the market who thought they couldn't sell due to a lack of equity, when in reality the increasing values will allow them to sell now and move up to the next house."