In the federal government’s haste to purportedly clean-up the mortgage industry, it recently passed legislation that will have a huge impact on countless consumers, homeowners and prospective home buyers. While I’m sure the new rules promulgated by the feds were meant to “correct” perceived past wrongs and “avoid” future wrongs, I unfortunately fear that these changes will have a chilling effect on the housing market, at least among the uninformed. The worst part is that very few people know what’s coming as these are hardly well-publicized facts.
As many readers might recall from a prior post (http://campanellalawfirm.com/blog/the-mystery-of-pmi-solved/), many types of mortgages require homebuyers to pay a monthly mortgage insurance premium as a component of their monthly remittance because they have purchased their home with less than 20 percent down. Why are these fees paid? They are basically a mechanism lenders use to protect themselves against a heightened risk of loan default because they buyer is purchasing the home with a relatively small down payment. Today we’re talking about changes to mortgage insurance relative to FHA loans, and quite the changes they are.
Beginning on April 1, 2013, a series of new rules will be implemented concerning (a) how much MIP must be applied to your FHA loan and (b) how long homeowners will be required to pay MIP. Under the old system, regardless of how much you put down, homeowners were only required to pay MIP until they reached 20 percent equity in their homes. Banks would automatically remove the payments from their bills once they reached 22 percent equity unless you notified them first that you had otherwise reached the 20 percent threshold.
Under the new system, the first change that will be experienced is that the premium rates are set to increase. The size of the increase is fairly modest, so depending on the size of your mortgage, you may or may not feel it in your wallet. That’s hardly the worst news though. Starting on June 3, 2013, a major change will go into effect that will exacerbate the premium rate increase and drastically impact many.
As noted above, under the old system, once you reached 22 percent equity in your home, your MIP would automatically stop. Assuming you follow a normal amortization table, that usually requires payments for about 9 years and 9 months. While not great, that doesn’t sound so bad because there’s an end in sight, right? Well, hold your breath folks because the new change is a doozy.
Under the new rules, if you’ve put down less than 10 percent down on your purchase, you are stuck paying MIP for the _LIFE_ of your loan. It will no longer matter if or how quickly you reach that magical 20 percent equity number. Because you put so little down in the first instance, you will be forced to pay it for as long as that loan is in place. If you happen to be one of the luckier ones who is able to afford to put a little more down on your purchase, but still less than 22 percent, you’ll fair better, but not by much. The new duration rules require that homeowners pay MIP for no less than 11 years, regardless again of how quickly you reach that 22 percent equity level.
For most homebuyers, especially in this still depressed economy, paying upwards of an additional 1.3 percent on your mortgage value for insurance premiums over the course of a year is painful. For a $100,000 mortgage, that will easily amount to well over $100 per month which many families simply can’t afford.
Maybe I’m biased, but I regrettably feel that the government’s interference in this system has, whether intentionally or not, set up a further obstacle for many people to purchase a home. In an already depressed economy where the housing market is trying to rebound, is this really the best course for us? I’ve got my opinions, but unfortunately only time will tell the true impact it will have.
On a final note, I’ll say this. If you are considering purchasing a home, do your homework. There are many alternatives to FHA loans available to potential buyers, so don’t unnecessarily count yourself out of the market just because one lender has said no. Consult with professionals, more than one if necessary, to understand your options!