by Dan Wolf
on Thursday, June 20th, 2013 at 8:02am.
The Federal Housing Administration (FHA) is the nation's largest provider of mortgage insurance for low down payment loans. This government program is making some critical changes that could cost borrowers thousands of dollars over the course of their loans. The FHA is now requiring borrowers who use their insurance to pay premiums for the entire life of their loan. How can this change affect you?
Typically, if a borrower is not able to put down at least 20 percent of the home's purchase price, lenders require them to pay mortgage insurance for the first few years of their mortgage. Once their principal balance drops below 80 percent of the home value, borrowers are usually able to cancel mortgage insurance. In fact, private insurance companies are legally required to cancel a borrower's mortgage insurance policy once they own 20 percent of their home. However, the FHA is exempt from that law. Their overhaul of the program includes extending the higher interest rate to include mortgage insurance for as long as the borrower has the loan.
What's the Difference?
Since this government program insures the majority of low down payment loans, critics say the changes could inflict high fees on struggling middle-class borrowers for decades. How much of a difference will the change make? The FHA estimates they could have generated $10 billion over the last three years if the change was already in effect. That's a lot of money coming from struggling middle-class families .
Under the old program, borrowers who put down five percent of their home value would usually hit 20 percent ownership in about seven years. At that point, their mortgage insurance would drop, saving them more each month and over the course of their loan. Now, they will continue to pay the higher rate for 30 years unless they are able to pay the loan off early.
Lessons to Learn
Be sure you understand the details of your loan. Just because you can afford the monthly payment, doesn't mean the loan structure is advantageous. FHA loans have long been sought by home buyers who lack a large down payment. However, considering their new rules, it might be best to seek traditional financing through an institution that uses a private insurer. Consider Wolf Real Estate Professionals as your resource for home buying. We'll not only help you find the perfect home, but we'll be there to guide you through the process. Contact us to get started.