FHA LoanThe Federal Housing Administration (FHA) is making some big changes to their mortgage insurance structure.

Starting October 4th 2010 the upfront mortgage insurance fee will be lowered from 2.25% down to 1%.

Sounds great doesn’t it?  Well hold on just a second…

FHA mortgage insurance is making up their losses by nearly doubling the monthly mortgage insurance that is mandatory on FHA loans.  Currently monthly mortgage insurance on a FHA loan is .55%, as of October 4th this will be .90% or even higher.

How does this affect you?

Typically borrowers apply for an FHA loan because the down payment requirement is only 3.5%, which is much lower than a conventional loan.  If you qualify for an FHA loan today your up front mortgage insurance may be $2,000 and your Monthly Mortgage insurance may be $90 (hypothetically).

If you get a FHA loan after October 4th your upfront mortgage insurance would be just under $1000, but your monthly mortgage insurance would nearly double at over $160 a month.  In this hypothetical scenario you would save $1,100 up front and spend $70 more per month.  It would only take 16 months before you spent more money monthly than you would have paying the mortgage insurance up front. After 3, 5, or even 10 years you are going to spend thousands of dollars more on the MI.

Now in a real loan the numbers may look different, but this scenario is meant to show you how the Federal Housing Administrations changes are going to affect you if you apply for a FHA loan after October 4th.

To Sum it all up…

In summary the new changes are going to end up costing homeowners who stay in their house longer than just few years thousands of dollars more.

If you stay in your home just a short time, like under 2 years, this new deal may end up saving you money.  Have your Loan Officer crunch the numbers so you know what type of upfront costs and monthly costs will be associated with your FHA loan.

And if you can qualify and close your FHA loan before October 4th 2010 that may save you thousands of dollars over the life of your mortgage insurance.

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