Prospective home buyers comparing mortgage options often begin by researching both conventional loans and FHA-guaranteed loans. The features of competing loans can vary enough to create measurable financial differences over several years. Individuals looking to buy a home should be sure to consider the value of a recent reduction in the cost of FHA mortgage insurance.
Most home loans require some variation of mortgage insurance. Although loans guaranteed by the U.S. Department of Veterans Affairs do not require ongoing mortgage insurance, they do assess an upfront funding fee. Conventional mortgages placed through traditional lenders typically charge ongoing fees for private mortgage insurance until the owner's equity in the home reaches a certain level.
FHA mortgage insurance
FHA loans are made by private lenders but are guaranteed by the Federal Housing Administration. In addition to an upfront insurance fee, FHA loans require ongoing mortgage insurance payments for at least 11 years. In addition to the duration of payments, your actual mortgage insurance rate is an important factor influencing mortgage selection.
Mortgage insurance rate reductions
Effective in January of 2017, the cost of insurance premiums on most new FHA-guaranteed loans was lowered by one-quarter of a percent. The cut follows an earlier rate reduction in 2015. The cuts were possible because rate increases in previous years had improved the financial condition of the fund in which FHA insurance funds are held. The rate increases had been necessitated by the housing downturn in earlier years, but the higher rates also affected demand for FHA mortgages.
Even as the economy has recovered in the aftermath of the housing crisis, the percentage of FHA loans in proportion to the total mortgage market has fallen. The recent lowering of FHA insurance rates is likely to make FHA loans more competitive with other mortgage options. Although the mortgage insurance rate is an important factor, it should be considered in conjunction with the interest rate and the down payment requirement.
Basis point rate measurement
The mortgage insurance required on an FHA-guaranteed mortgage is measured in basis points. One hundred basis points are equal to 1 percent of the loan amount. The rate for any particular mortgage is based on factors such as loan-to-value ratio and length of the mortgage. After the 2017 change, for example, the annual mortgage insurance rate on a 30-year home loan with an 85-percent loan-to-value ratio is 55 basis points.
Your annual mortgage insurance premium is recalculated each year by applying the basis point rate to the average outstanding balance for the year. Contact a real estate agent that can help you buy a house for more information about comparing home mortgage options.