Mortgage insurance rates going up

RISMedia reports this morning that a bill authorizing much higher mortgage insurance rates for FHA loans has passed the House overwhelmingly:

FHA Reform Act and Annual Mortgage Premiums; What an Increase Means for Borrowers

The bill now goes to the Senate, where it will presumably pass quickly, and then go on to the President for signature.

The portion of the mortgage insurance premium collected at closing already went up in April 2010, from 1.75% to 2.25%.  Now, the change authorized by this new bill will affect the amount built in to every monthly payment on the mortgage, apparently beginning with loans originated in 2011.  The FHA commissioner says they don’t plan to move to the new maximum rate immediately, but if and when they do it will almost triple the amount of each month’s payment that is mortgage insurance.

In Texas, property taxes and interest will still represent the vast majority of most mortgage expenses, especially in the first 5 to 10 years of the loan.  Don’t minimize the effect of this change, however.  For homebuyers with minimal cash available for down payment, FHA has become the best available mortgage loan alternative — by far!  An increase in the monthly mortgage insurance premium will reduce the loan amount, and therefore the purchase price, a prospective buyer can qualify for.

The RISMedia article includes two examples.  In both cases, the amount an FHA borrower can qualify for is reduced by more than 10%.  For someone planning to buyer a median-priced house in Austin, this will reduce the allowable purchase by more than $20,000!

So we have seen the end of two homebuyer tax credit programs.  We also saw the end of the Fed’s support for mortgage-backed securities, which held mortgage interest rates artificially low for more than a year.  (Investors’ fears about the world economy have staved off the inevitable rate increase so far, but mortgage professionals that I know still expect higher rates by the end of this year.)  Now, it looks like every house purchased next year with an FHA mortgage will cost more than it does today. 

If you are planning to become a homeowner in the next 12 to 18 months, and you have the ability to make a 3.5% down payment, now it your time.  Don’t wait until 2011!