On October 4, FHA mortgages get a little less expensive upfront, but a lot more expensive in the long-run.
FHA mortgages are the only game in town for first-time buyers. Most first-time buyers obtain FHA mortgages.
Until now the FHA premium (called MIP) paid by the buyer at closing was 2.25% of the loan amount. From here forward, it will be reduced to 1%. That’s good and will reduce initial closing costs.
With an FHA mortgage, in addition to the upfront MIP payment, the buyer also pays a monthly MIP premium that’s included in the monthly payment. This payment will increase.
It used to be .55% of the loan amount (this is the yearly amount, divide by 12 for the monthly payment). Now it will be .9%, almost twice as much.
Buyers should not automatically assume an FHA is best. This increased FHA expense means that buyers should carefully examine FHA vs. conventional mortgages because a 5% down conventional mortgage will be much cheaper than an FHA.