“Home is where children find safety and security, where we find our identities, where citizenship starts” -Matthew Desmond. As Mr. Desmond says, there’s something truly magical about owning a home. Owning a home is about having a place that’s all your own, a place where you always feel safe and secure. Yes, owning a home has been an integral part of the American Dream. However, home ownership has changed since the days of the early settlers.
Today, the purchase of a home is a very tedious process. This means that a prospective homeowner must keep tabs on all aspects of the housing market. This includes changes in mortgage insurance. For those new to the concept of buying homes, mortgage insurance has become an integral part of the purchasing process in recent years.
This means that any changes to mortgage insurance policies, such as the one enacted by Donald Trump in July, deserves your attention. Only a few days after stepping into office, President Trump reversed a certain fee cut enacted by the Obama administration. This change affects many current and future homeowners. The change is of particular interest to those younger fellows looking to purchase a home.
Why is mortgage insurance important?
In recent years, the cost of housing has reached a record high. The current median price for a home in the US is $282,00. This is much higher than it has ever been at any point in history. For most people, this means the only way to purchase a home is by taking out a mortgage. However, when a home costs $282,000, even 20% down payment can be infeasible. Therefore, if you’re a young home buyer, chances are you’re going to need mortgage insurance.
Mortgage insurance typically comes into play when a prospective homeowner decides to purchase a home with a down payment below 20%. “This insurance is required for the purposes of deflecting risk.” Said insurance compensates lenders in the case of homeowners defaulting on their loans. One of the most popular forms of insurance is provided by the Federal Housing Administration (FHA) via FHA-backed loans.
An FHA loan does not contain the strict standards of a conventional loan. This type of loan requires two kinds of mortgage insurance premiums. One that is paid in full upfront and the other is a monthly payment. Also, FHA loans require that the house meet certain conditions and an FHA-approved appraiser has to examine it.
Upfront mortgage insurance premium (UFMIP) — This is a one-time upfront monthly premium payment. Borrowers will pay a premium of 1.75% of the home loan, regardless of their credit score. Example: $300,000 loan x 1.75% = $5,250. You can pay this amount upfront at closing as part of the settlement charges.
Annual MIP (charged monthly) — This monthly charge will be supplemental to your mortgage payment. The amount of the mortgage insurance premium is a percentage of the loan amount. This is set according to the borrower’s loan-to-value (LTV) ratio, loan size, and length of loan.
Here is an example. The annual premium on a $300,000 loan with term of 30 years and LTV less than 95 percent is $2,400 ($300,000 x 0.80% = $2,400). To find the monthly payment, simply divide $2,400 by 12 months which equals $200. Hence, the monthly insurance premium would be $200 per month.
What is FHA?
The Federal Housing Administration is the largest mortgage insurer in the world, and has a history dating back to the 1930s. The government program allows buyers to purchase homes with as little as 3% down payment. This is because insurance from the FHA is gives the loan backing from the federal government. This assures banks that their loans will be paid back, no matter what.
Unfortunately, FHA mortgage insurance has also become very costly over the past several years. Firstly, in order to purchase FHA insurance, a prospective homeowner must present 1.75% of the loan being set to the FHA as an upfront fee. Furthermore, once the home has been purchased, the homeowner must pay an additional monthly fee known as an MIP, or monthly insurance premium. Annually speaking, this fee is approximately equal 0.85% of the loan insured.
How has FHA changed?
Much like the housing costs themselves, this MIP rate is particularly high when compared to the rest of American history. For contrast, one can see the rate that Americans faced in 2007 (before the recent recession) was only 0.55%. According to recent economic findings, this rise in rates costs the average FHA loan-user $450 a year. For those who live in more affluent areas, the additional cost averages out to about $1,500 each year.
In response to this, the Obama administration enacted a forced restriction on the rate which would bring it down to 0.60%. Due to this rate (just slightly above 2007 levels), home ownership is a bit less financially draining. The restriction was for the sake of the newer generation (specifically millennials), who are reluctant to enter the housing market.
However, soon after the restriction came into effect, the act was personally reversed by President Donald J. Trump. Citing concerns that the drop in rates would trigger yet another bailout, President Trump’s department eliminated the rate change so as to reduce the risk to American taxpayers. This has, of course, led to a reduction in home purchases.
What does this mean for me?
For prospective homeowners, this change means that purchasing a home today with low down payments may cost you at least $400 more annually. This means that prospective home buyers today must take more care to manage their insurance and housing costs. There is still hope, however. Housing prices have started to fall in recent months, and many leading experts say the trend will continue. Hopefully, housing will soon once again be an affordable part of the American Dream.