The FHA mortgage insurance (MIP) rate cut which was scheduled to go into effect January 27th, and was enacted on January 9th, as one of the last orders of business by the Obama administration. Once it’s said and done, the big takeaway from the whole thing may be, you can’t miss what you never got. And none of us got it.
So what was the amount of the rate cut we’ll never see? .6%. That might not sound like much but had it gone into effect, FHA home loan borrowers purchasing a home for $200,000 would have seen a reduction of approximately $100 per month. That’s one more trip to the grocery store, a utility bill, or a phone bill.
But what does it all really mean? Let’s get into it in a way all of us can understand.
Here’s what you Need to Know About the FHA and MIP
MIP, sometimes generically referred to as MMI or “monthly mortgage insurance” is a special kind of insurance designed to protect the lender. It works in conjunction with FHA loans in the following way. When the borrower of an FHA loan (a homebuyer) does not have the full 20% down payment for a home, as a regular part of the deal, the Federal Housing Authority stipulates that they get MIP to protect the FHA from incurring a loss in the event that they default on the loan. The Mortgage Insurance Premium money paid by homebuyers is then funneled into the FHA’s Mutual Insurance Mortgage Insurance Fund.
Such a system has worked pretty well so far since the FHA can recoup any losses from insured loans that become delinquent and, with the insurance, FHA borrowers can more easily become homeowners even if they fall short of meeting the once-mandatory 20% down payment.
Currently, applicants for FHA loans are required to have a minimum FICO score of 580 and a minimum down payment of 3.5%. Borrowers with lower FICO scores are required to have a 10% down payment. Borrowers in both of these aforementioned groups would be required to pay MIP until they have 22% equity in their homes and have paid into MIP for a minimum of five years.
Let’s Break it Down and See What The Rate Change Amounts To
Do the math and you’ll see in the above scenario, if you purchase your home for $200,000 you must have a balance of $156,000 (200K x 78%) or less to be able to drop the MIP. And for those of you wondering if getting a fresh appraisal once property values rise is a way to drop MIP, such may be the case on the private loan market but not so with FHA loans.
The cost of MIP currently stands at 1.75% the value of the loan. So the MIP for a $200,000 loan with a downpayment of 3.5% ($7,000) will come to $3,377.50 annually (193K x 1.75% = $3,377.50).
Prior to leaving office, the Obama administration had a .6% MIP rate cut due to kick in on January 9th which would have brought the rate down to 1.15%. When we do the math with that lower rate, MIP decreases to $2219.50 (193,000 x 1.15%) or $1158 less than current rates.
While the mortgage insurance rate cut would have equalled somewhat substantial rate cuts for FHA home loan borrowers, you can’t miss what you never got. Hence, if anything, the FHA MIP buzz has given all of us the opportunity to learn a bit more about the nitty-gritty of FHA loans and requirements and to be reminded that every fraction of a percentage point counts when we’re talking about interest and sizable loans.