FHA loan fees have been on the rise lately as FHA, along with other mortgage guarantors, has been losing money since the housing crash began. FHA is not a lender, but does guarantee loans for lenders who do make the loans, against losses. An increase in monthly fees is scheduled to go into effect on September 7, 2010.
Currently, FHA loans require an upfront insurance premium that can be added to the loan amount, and a monthly premium currently capped at 0.55% of the loan amount. In Oregon, the average home price is around $300,000. With a minimum down payment of 3.5% ($10,500), the average loan amount might be approximately $290,000. The monthly FHA premium currently would be approximately $135.00. (Remember that the monthly premium is based on the loan amount, so the loan amount will be the purchase price, less the down payment, plus the annual FHA premium).
The proposed change, which has just been approved by the Senate, allows FHA to raise the monthly premium to as high as 1.5%. This is a huge increase.
In order to avoid buyer shock at this huge increase, FHA plans to raise the premium in three stages. Currently, the proposal for September 7 is to increase the monthly premium to .85% with a 5% down payment, and to .90% with only a 3.5% down payment. This will equate to a monthly premium of $205.42 at .85% and $217.50 at .90%. However, an increase to 1.5% will increase the monthly premium to $362.50! For many home buyers, the increased premium will lower the purchase price of the home they can qualify to buy.
To offset the increase in monthly fees, the proposal also is to lower the upfront premium, which is currently at 2.25% to only 1%. This means the actual effect of the increased premium will be felt slightly less because the upfront premium is typically added to the loan amount.
Currently, a home buyer would be looking at the following scenario:
Purchase price = $300,000.00
Less the 3.5% down payment of $10,500.00
Plus the FHA premium of 2.25% 6,513.75
TOTAL LOAN $296,013.75
The proposed scenario would reduce the FHA upfront premium to $2,895.00, which would reduce the ultimate loan amount.
FHA loans are on the rise. Currently approximately 20% of all loans originated are FHA guaranteed. The advantages of this type of financing begins with the low down payment requirement, so in fact this type of financing is popular even for those with very good credit scores and credit histories. Unlike conventional financing, FHA loans also permit lower credit scores and blemished credit histories, so have long been popular with a huge segment of the population.
In addition to the increased monthly premiums, another huge disadvantage of the new plan is that unlike current FHA guidelines, where the monthly premium disappears once the home owner has 22% equity in their home, the new plan will keep the monthly premium in effect throughout the life of the loan! The actual increase in costs under the new plan will depend on how long the home owner keeps the home, and the original loan, but could actually increase the real rate being paid as much as 1.3%!
It is not yet known when the additional increases in premium will go into effect. The new fees are expected to raise more than $3.5 billion annually for the FHA.
For those potential home buyers still on the fence about whether or not to buy now, consider the following:
- Mortgage rates are at record lows - in some states, such as Oregon, FHA and conventional rates for the best qualified borrowers are under 4.5%.
- Home prices are stabilizing, and are even projected to rise in some areas as early as this year.
- If you do not have big down payments, the increased FHA costs could price you out of the market for your dream home.
- Whether or not property prices begin to rise any time soon, the actual cost of financing your home will increase substantially as fees continue to rise, and when mortgage rates start to climb. This could significantly offset any more drops in home values over the coming months.
Example: A $300,000 conventional home loan at 4.5% = monthly payment $1,520.00 plus taxes and insurance. Over 30 years this loan will cost $547,220.00.
The same $300,000 FHA home loan at 4.5% = monthly payment $1520 PLUS FHA at current rate of .55% = $137.50. Only 5 years (estimated) of FHA premiums increases cost only $8,250.
But beginning September 7 - when FHA fees rise - look at the following scenarios to see how much this will cost!
The same $300,000 FHA home loan at 4.5% = monthly payment $1520 PLUS FHA @.85% = $212.50 plus taxes and insurance. Over 30 years this loan will cost an additional $70,000!
The same $300,000 FHA home loan at 4.5% = monthly payment $1520 PLUS FHA @1.5% = $375.00 plus taxes and insurance. Over 30 years this loan will cost an additional $130,000!
If mortgage rates rise to 5%, this same loan will have a minimum monthly payment of $1610.47. The same house financed over 30 years at just 5% will cost an additional $32,570. (Increase of $90.47 x 360 months = $32,570!)
On the flip side, this is still a very scary jobs market. Unemployment is still at almost 10% in Oregon, and certainly above 9.5% for most of the country. But investors are buying up property in droves. In fact, these investors are from around the world, snapping up the best properties, especially in resort areas. One such resort area, Bend, Oregon, is one of the areas of the country that is already seeing a stabilization in prices and is forecast to rise in values this year!
These are big numbers, so consider the cost in waiting versus buying, if you are still on the fence.
One has to wonder if these increases are also about moving people off the fence, which will stimulate the housing market and the economy, as it is about fees.
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