The good news is that the premium you must pay up front is dropping from 2.25 percent to just 1 percent. Even if you don't pay that premium up front, which is true for most people who take advantage of FHA's low-down-payment option of just 3.5 percent, you will save money each month because your mortgage principal will be lower with the lower up-front fee.
But just how much more will you have to pay monthly?
Let's take a look at two scenarios for a 30-year mortgage:
- Buying a $200,000 home with 3.5 percent down and paying the FHA fee up front.
- Buying the home and financing the up-front fee.
Under the old fee structure, if you wanted to pay the FHA fee up front the cost would have been $4,343. Now it's $3,281 less at the outset -- just $1,062. But the bad news is that your monthly payment will go up because of the higher annual premium.
Under the old fee structure, with just a 0.55 percent annual fee the cost of FHA insurance was just $1,062 ($88.46 per month). But at 0.9 percent annually, you will pay $1,746 ($145.54 per month). That's $56.29 more per month for an FHA loan.
For buyers who do pay the up-front premium with cash, you will see a savings for the first 58 months, but then the costs will go up compared to the old law: $3,281 in up-front savings divided by $56.29 equals 58 months.
If in that time you refinance or your home goes up enough in value, you could end up saving money with the new FHA fee structure. FHA annual premiums can be canceled if your loan-to-value ratio reaches 78 percent.
For those who take an FHA loan and don't pay the up-front premium with cash, your cost increases will be seen in the first year.
Under the old rules you could roll the $4,343 up-front premium into the loan amount. That would make the loan $197,343 ($193,000 plus $4,343). With an annual premium of just 0.55 percent, the amount you had to pay was $1,085 ($90.45 per month). Under the new rules your premium will go up to $1,746 ($145.54 per month).
The good news is that you will be paying a little less per month on your principal and interest payment because of the lower up-front premium that will be added to the principal of the mortgage.
Under the old fee structure, interest on that extra $4,343 in mortgage principal cost you $22.01, because the principal and interest payment on a mortgage of $197,343 would be $999.91. But under the new fee structure, with just $1,062 financed, your principal will be $194,062, and your monthly principal and interest payment will be $983.28, or a savings of $16.63.
However, your monthly costs will go up by $38.36 per month, starting with the first month under the new fee structure. That's less of an increase than those who pay the up-front fee with cash. So there's little advantage to paying that up front.
By paying it up front, you'll reduce your monthly principal and interest payment by $5.38 on your mortgage and 79 cents per month on your annual premium, for a total savings of $74.04 annually. But it will cost you $1,062 in cash to realize that savings. If you pay off the loan early, you don't get any of the $1,062 refunded to you.
While it's generally made sense not to pay the up-front premium in cash, it's a no-brainer now. Roll that up-front premium into the mortgage.
Lita Epstein has written more than 25 books including "The Complete Idiot's Guide to Improving Your Credit Score" and "The Complete Idiot's Guide to Personal Bankruptcy."
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