As we mentioned in an earlier post, the fee structures for FHA mortgage insurance are officially changing on Oct. 4, 2010. The upfront mortgage insurance fees for getting into an FHA loan are being cut by more than 50% but the monthly mortgage insurance fees (sometimes called PMI) are almost doubling. Here is a bit from a recent LA Times article on the topic:
On new low-down-payment FHA-insured loans originated on or after Oct. 4, the annual premium will rise to 0.9% of the loan amount from 0.55%. At the same time, though, the upfront premium will be lowered to 1% of the loan amount from 2.25%.
And because most borrowers choose to finance the initial fee as part of the loan amount, the overall effect will be easier on the checkbook — for a few years, anyway.
FHA loans will be less expensive in the short run but more expensive the longer one keeps the FHA loan. This is because the monthly mortgage insurance payments remain on FHA loans permanently. Of course because FHA loans allow one to refinance up to 97% of the current value of the home and allow for credit scores as low as 580, they are still the best refinance option for many people with little equity or less than stellar credit. Keep in mind that borrowers could potentially refinance out of their FHA loan and into a conventional loan with no PMI a few years down the road, assuming they get to at least 20% equity. So with rates at historic lows now, refinancing into an FHA loan could make a lot of financial sense.
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