The Biden administration recently announced changes to required FHA insurance premiums. For current homeowners with an FHA home loan and prospective homebuyers pursuing an FHA loan, this means savings are coming down the pipeline.
While any savings are certainly a relief to homeowners, understanding the specifics of how this change may impact you is helpful. Let’s explore how these lower costs may impact your mortgage payments.
Biden administration lowers premiums for FHA-insured mortgages
In late February 2023, the Biden administration announced a reduction to mortgage insurance premiums on federally insured mortgages.
Specifically, the action involves lowering the annual mortgage insurance premium tied to these loans by 0.30%. For most new borrowers, this means the annual mortgage insurance premium will be lowered from 0.85% to 0.55%.
The change to mortgage insurance premiums comes at a time when rising interest rates are cutting into the budgets of prospective homebuyers across the country. Regardless of the higher interest rates, these cuts can help homeowners save money every year.
“At a time when budgets are tight and homeownership is out of reach for too many, FHA’s premium reduction will allow more households to access the stability and wealth creation of homeownership, particularly the first-time homebuyers and families of color who rely heavily on affordable FHA-insured mortgages,” said Julia Gordon, the Assistant Secretary for Housing and Federal Housing Commissioner, in a press release.
Gordon continued, “For many families, the savings will make the difference in their ability to purchase the home of their choice.”
How this change could impact you
Whether you currently have an FHA-insured or plan to purchase a home using an FHA mortgage, the recent announcement will have an impact on your budget.
Here’s the breakdown of savings opportunities:
Current homeowners with FHA mortgage
As a homeowner with an FHA mortgage, you’ll see your annual mortgage insurance premiums decrease. You can expect your monthly payment to decline.
If you aren’t sure how much the reduced mortgage insurance will impact your payment, consider reaching out to your loan servicer. The loan servicer should be able to help you nail down the changes to your payment.
According to the Biden administration’s announcement, the premium reduction will take effect on March 20, 2023. In the coming weeks, your mortgage lender might reach out to you about the changes.
Future homeowners with FHA mortgage
If you are a prospective homeowner, you’ll see the lower mortgage insurance premiums baked into your original mortgage loan documents. For buyers closing on a home after March 20, there shouldn’t be any implementation issues.
When choosing a home to purchase, the lower mortgage insurance premiums might have an impact on your decision. For example, the lower costs could help you afford to purchase the home you really want. Additionally, the lower insurance premiums might help you qualify for the wealth-building opportunity homeownership provides.
How much can you save
The exact amount you can save on mortgage insurance premiums varies based on the size of your loan. According to the White House, the average homeowner and homebuyer with an FHA-insured mortgage will save around $800 per year.
If you are one of the approximately 850,000 homebuyers and homeowners projected to see these savings, your budget might see a bit more wiggle room.
Here are some examples of how much a homebuyer might save:
- Homebuyers in Detroit with a $200,000 mortgage could save around $600 per year
- Homebuyers in Cincinnati with a $300,000 mortgage could save around $900 per year
- Homebuyers in Phoenix with a $400,000 mortgage could save around $1,200 per year
- Homebuyers in Austin with a $500,000 mortgage could save around $1,500 per year
As a homeowner or prospective homebuyer, the exact amount you will save varies. Depending on your situation, you might save several hundred or over a thousand dollars per year. It’s easy to see how this change will likely have a positive impact on your budget.
Reasons for the change
The FHA loan program is designed to encourage homeownership. Throughout the history of the program, the rules have changed periodically. The most recent rule change was spurred on by a desire to keep homeownership affordable.
Here’s a closer look at the reasons behind the change.
Keep homeownership affordable
Homeownership is an important way for households to build wealth over time. One goal of the FHA home loan program is to keep homeownership affordable for potential buyers. According to the White House press release, “this cost-lowering measure will make buying a home more attainable and affordable for more low- and middle-income borrowers.”
The program and these cost cuts are intended to help, “first-generation homebuyers and first-time homebuyers of color – who are less likely to have sufficient resources for a sizeable down payment due to a longstanding gap in intergenerational wealth transfers – have been particularly affected.”
Excess mortgage insurance fund
Lower costs for homeowners with an FHA-insured mortgage are enticing. However, the step was made possible by excess funds in the FHA’s mortgage insurance fund.
Mortgage insurance premiums are designed to protect the lender. In this case, the premiums help protect the FHA and the taxpayer from a loss when a borrower defaults on their home loan. The premiums are held in the FHA’s mortgage insurance fund, which must maintain a certain amount of reserves dictated by Congress.
Recently, the FHA’s mortgage insurance fund accumulated more than five times the required reserve levels. With the excess reserves, the FHA is in a very good position to shield the taxpayers from the fallout of borrower defaults.
Since the reserves have reached high levels, the FHA has more wiggle room in its costs. Ultimately, this means that the FHA is able to make do with lower mortgage insurance premiums without putting the taxpayer at risk or impacting the long-term sustainability of the FHA’s mortgage program.
When will premiums be reduced?
According to the Biden Administration’s announcement, the changes will go into effect on March 20, 2023. As a homeowner or prospective buyer, you can expect to see the savings from the announcement after that date.
For homeowners who have questions, don’t hesitate to reach out to your mortgage loan servicer. As a homebuyer, your lender should be able to provide the information you need about these lower costs.
The bottom line
Homeowners with an FHA-insured loan and homebuyers seeking an FHA-insured loan can expect lower loan costs. With lower PMI, homeowners can enjoy more flexibility in their budgets.
Prospective homebuyers might use this wiggle room to boost their approval odds or qualify for a larger loan. Current homeowners might funnel the newfound savings toward their mortgage balance or other financial goals.
Want to learn more about FHA loans? Explore this home loan option here.