Do you plan to use an FHA loan to buy a home in 2017? If so, I have some good news. The Department of Housing and Urban Development (HUD) announced this week that it would reduce the FHA annual mortgage insurance premium (MIP) for 2017. This change will take effect later this month, and it could save homeowners an average of $500 this year according to officials.
In 2017, the annual MIP for most home buyers who use a 30-year FHA loan will be reduced to 60 basis points or 0.60% of the loan amount. See the table below for details.
Mortgage Insurance Premium Table, and Additional Details
Borrowers who use the Federal Housing Administration (FHA) loan program to purchase a house are generally required to pay two different mortgage insurance premiums or MIPs. This insurance protects the lender in the result of borrower default.
- There’s an upfront premium, usually set at 1.75% of the loan amount.
- There’s also an annual premium, which is the one being reduced for 2017.
On January 9, 2017, HUD officials announced they would be lowering the annual mortgage insurance premium rate by 25 basis points or 0.25%. This is great news for borrowers who plan to use an FHA loan to buy a house because they could save an average of $500 per year according to HUD.
The revised annual mortgage insurance rate will apply to most new FHA mortgage loans with a closing/disbursement date on or after January 27, 2017.
The table below was published along with the official policy update sent out by HUD on January 9, 2017. You’ll see the reduced mortgage insurance premiums under the “New MIP” column on the right.
The FHA’s MIP tables can be confusing at first glance. But there’s a method to reading them. For starters, you’ll want to find your loan’s term or length. If you’re going to use standard 30-year FHA loan, refer to the top half of the table where it says: “term > 15 years.” Next, use the loan amount column that applies to you. The “LTV” column is essentially the inverse of your down payment. Most FHA borrowers put down 3.5% since that’s the minimum down payment for the program; so the LTV, in this case, would be 96.5%.
Bottom line: Most FHA borrowers in 2017 will end up with an annual mortgage insurance premium rate of 60 basis points, or 0.60% of the loan amount.
Pros and Cons of the Program
There are pros and cons to every kind of mortgage loan, and this applies to the FHA program as well. Borrowers who use this program generally encounter the added cost of mortgage insurance.
On the surface, this might seem like a drawback to using an FHA loan to buy a house. But this insurance coverage allows people to buy a home who wouldn’t otherwise qualify for a mortgage loan with such a low down payment.
In order to avoid mortgage insurance entirely, you would have to make a down payment of 20% or more, or use a “piggyback” loan strategy. Thus, the FHA program is a viable option for home buyers with limited funds saved up for a down payment.