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Aug 16

FHA Changes Mortgage Insurance

This is a big change; on Oct 4, 2010 FHA will lower the up-front MIP factor from 2.25 to 1.00.  This sounds great but it isn’t necessarily the case.  The monthly factor will bump from .55 to either .85 – .90.
 
I ran an example based on an interest rate of 4.5% with a loan amount of $150,000.  The UFMIP drops from $3,375 to $1,550, a difference of $1,825.  However the monthly MIP at .85 instead of .55 jumps from $68.75 to $106.25 which is $37.25 higher per month. 
 
The net result is a monthly payment that is $26.72 a month higher under the new factors.  I have seen several first time home buyers balk over $10 a month.  Another issue is the higher payment will cause ratio problems for all of those that are right on the edge to begin with.  This is going to cause some buyers to be declined on ratios.  Really bad for those that have already been pre-approved but have not found a property yet.  They need to get that case number by 10/3.
 
The buyer is ahead until the 69th payment at which time they pass the cross over point, $1,825 / $26.72 = 68 months.  I know, I know, that is really simple way to look at it, but it is close. 

I do not understand the logic of the change.  Defaults usually happen early in the game so lowering the up front insurance does not seem like the right choice.  Interesting math problem.

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