Cost of FHA loans set to increase again

For Sale

FHA-supported home sales are about to get more expensive. Image: Flickr / nickbastian / CC-BY-ND

Last year, the Federal Housing Administration hiked the cost of getting a federally supported mortgage. April 18, 2011, the cost will increase again. This increase could make it even more difficult to get a mortgage in the tightening market.

The place of FHA loans

Federal Housing Administration home loans are a very specific subset of home mortgages. Rather than directly providing bad credit personal loans not payday loans, the FHA insures mortgages from other lenders. FHA-insured loans often require very little down payment — between 3 and 6 percent, rather than the standard mortgage down payment of 10 percent. FHA mortgages can be taken out for any amount up to $729,750. The intention is that borrowers who can make mortgage payments but have a tough time making a down payment can become homeowners.

Cost of getting an FHA loan

For borrowers, getting an FHA loan is not significantly different than getting any other mortgage loan. FHA loans require that the borrower pay mortgage loan insurance, so if the loan goes bad, the federal government can reimburse the lender. For many years, FHA loans required a 0.5 percent premium be paid as mortgage insurance. In 2010, that amount went up to 0.9 percent. In April, the cost is going to increase another 0.25 percent, bringing the total to 1.15 percent of the total loan amount. For FHA borrowers, this essentially adds 1.15 percent to the mortgage interest rate to be paid each month. For a $157,000 mortgage, this increase will cost slightly less than $400 per year extra.

The improving portfolio of the FHA

In the first quarter of 2011, the Federal Housing Administration wrote mortgage insurance for a portfolio of $72.1 billion worth of loans. This is fewer mortgages than in previous years, though the FHA also wrote more refinancing loans. The good news is that fewer FHA loans are currently entering default. The bad news is that the lower number means the FHA has to increase rates in order to remain solvent. For most borrowers, this is an indication that the cost of all mortgages will start going up. This could be an indication that the housing market and the economy are recovering, or it could be an indication that the federal government is still nervous about the status of mortgage lending. Either way, the boon of low interest rates is sure to end soon.

Sources

Tampa Bay Times
Total Mortgage

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