Days ago, just after Trump’s inauguration, the new President suspended a mortgage premium rate cut for FHA Home Loans. The Department of HUD explained that the change was “effective immediately” and “suspended indefinitely”. Practically every major news outlet wrote a piece in response to this decision. Any time an organization or leader takes back an expected discount or a measure of savings, the response will naturally be negative, or at least surprise and caution. In order to move passed the shock and awe, let’s take a look at the facts so that we can see the real meaning behind what is happening.
A quick reminder: A “conventional” was the standard for decades, whereby a bank or mortgage lender would require a down payment of 20% of the purchase price of a home. This essentially allowed the lender to protect themselves in case of a default on the loan by having 20% of the home’s value. Programs like those provided by the FHA ask for a significantly less down-payment, as low as 3.5%, which makes it much more affordable for home buyers to get into a home loan with less cash out of pocket.
However, requiring a lower down payment increases the risk to the lender, so “mortgage insurance” is added as an expense to the borrower to help protect the lender from those who default on their loans. The scheduled rate cut was for the insurance costs on these types of FHA loans.
Let’s take a look at the numbers concerning the FHA proposed reduction, as given by major news sources. The LA Times and CNN estimated an average of $500 in savings for FHA borrowers, CBS News quotes the National Association of Realtors as using a $576 per year savings. Using the higher number, that represents an average of $48 per month in savings. Based on the same CBS article, the median home price in the U.S. is $234,900. An FHA loan on that house would require a down payment of $8,221.50 with a principal and interest payment of $1,227.37, not to mention taxes and homeowner’s insurance. Let’s throw in $800 a year for insurance and $1,000 a year for taxes, making the total monthly payment $1,377.37
- $234,900 – Purchase price of home
- $8,221.50 – Down Payment Required
- $1,377,37 – Average Monthly House Payment
- $48 – Average Savings of Mortgage Insurance Reduction
This means that if you buy a house above average you will have more savings, and if you buy a house that is less expensive, your savings will be less. So if you imagine your house payment being half of the average, then the savings lost will be more like $24 per month.
Saving money whenever you can is an important part of your personal finance strategy, however, sometimes the media can make a change look horrific by using language like “The NAR estimated that some 30,000 to 40,000 people who would have been able to afford a home purchase with the anticipated lower fee will now be shut out of homeownership”. It is my opinion that if $48 a month is going to catastrophically change your ability to make a $1,377.37 house payment every month, you may be stretching yourself too thin anyway. In a day and age following a real estate market crash that was at least partially precipitated by loans that were too easily obtainable and an FHA bailout around the $1.7 million mark, we should all take care with our finances. If you don’t already have a strong financial plan for you and your family, I would suggest Dave Ramsey’s Financial Peace University.
Hopefully, over time, the FHA will have whatever the appropriate level of insurance coverage is necessary to allow them to function properly and stay out of financial trouble. Make sure that you are talking to a professional lender and a professional Realtor® about your home buying decision, and anything that may affect your journey.
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