Recently, the Federal Housing Administration announced that it will be reducing mortgage insurance premiums for home loans backed by the agency, cutting back premiums from 1.35 percent to 0.85 percent. This is one of the many ways in which the Obama administration is trying to stoke the housing industry going forward, while opening housing up for less affluent consumers hitherto shut out of the market. In a new blog post, the Urban Institute offered its proverbial “two cents” on the mortgage premium reduction.
Reduced premiums, however, would not be the only benefit of such a change. In a prepared statement, the White House said that present homeowners who refinance into an FHA mortgage will also see reductions to their mortgage payments. “In total, this action will help millions of families save billions of dollars in mortgage payments in the coming years, helping to support the housing market recovery,” read the statement in brief.
According to the Urban Institute, FHA borrowers could stand to save an average of $900 per year, which is significant in the grander scheme of things. It is estimated that over three million present FHA borrowers could save money through these reduced insurance premiums.
However, the effect of these changes, as mentioned above, may be felt most by low-income consumers and first-time FHA borrowers. These consumers, who are primarily younger individuals from the “millennial” demographic were previously unable to afford a new home, but with the FHA having changed its rules, that may have them finding “the math more favorable,” thus giving them a better chance to own a home.
But it may not just be low-income borrowers who can take advantage of the new, improved mortgage premium rates. Even borrowers who have a high FICO score (“credit score”) can potentially benefit from the changes, as these consumers would have previously “found (government sponsored enterprise mortgages from Fannie Mae and Freddie Mac) more cost effective.” Still, the Urban Institute posited that the broader mortgage market would be able to benefit most significantly from the premium cutback, as it would make FHA loan pricing “more competitive” in relation to private mortgage insurance.
Looking at the bigger mortgage picture in 2015, the FHA’s decision to cut back on mortgage insurance is expected to play a vital role in convincing more consumers to stop “sitting the fence” and make more of an effort to qualify for homeownership. Aside from this move, Freddie Mac and Fannie Mae have also made their own changes, reducing the minimum down payment percentage from 5 percent to 3 percent for loans that they guarantee.
The mortgage space has also seen some positive trends in recent weeks, including a general trend of lower mortgage interest rates. In most surveys, 30-year fixed-rate mortgage products are now below the 4 percent mark, while 15-year FRMs are generally below 3 percent. This, aside from attracting more new homeowners, should give additional incentive to anyone thinking of refinancing under the current rates and saving on their monthly mortgage payments.