The Federal Housing Administration recently announced that as of January 26, 2015, it will reduce the annual mortgage insurance premiums for FHA loans by .5%. On average, the reduction could save an FHA loan borrower about $900 per year. (Learn more about FHA Loans.)
What Are FHA Mortgage Insurance Premiums?
If you get an FHA-insured loan you’ll have to pay mortgage insurance (mortgage insurance protects the lender in the event you default on loan payments). There are two types of mortgage insurance premiums (MIPs) that you must include in your FHA loan agreement:
- Upfront premium. This is a one-time payment that you make when you first get the loan. It is currently 1.75% of the loan amount. The new FHA rules do not change this premium amount.
- Annual premiums. Unless your loan-to-value rate is substantial, you’ll also be required to pay annual mortgage insurance premiums. Although called annual premiums, you pay them monthly. The amount you pay is based on the length of your loan, the amount you borrow, and your loan-to-value rate.
Reduction in FHA Annual Mortgage Insurance Premiums
The FHA’s new rules reduce the annual premium by .5% for loans that are greater than 15 years. While the total percentage that you must pay for annual premiums varies based on a number of factors, most people are currently paying 1.35% for loans greater than 15. The new rates for these loans will be .85%. (The MIP rates on loans that last less than 15 years will not change; those loans already have a rate lower than .85%.)
U.S. Department of Housing and Urban Development Secretary Julian Castro predicts the new rates will save the average FHA loan borrower about $900 per year.
When Does the Premium Reduction Go Into Effect?
The new rates will apply to loans made on or after January 26, 2015.
What If You Already Have a Loan With Higher Premiums?
The FHA announced two fixes if you already have a loan with higher premiums or if you are currently in the loan process.
Cancel loans in process. The FHA will allow lenders to cancel loan files already in process so that borrowers can start over and get the lower premium rate.
Refinance. If you have an FHA loan made after May 31, 2009, you can refinance in order to get a new loan with the lower premium. (Loans made prior to May 31, 2009 already have lower rates.)