FHA just reduced MIP by 30 bps! Awesome…what does that mean?
April Gould, February 23, 2023
On February 22, the Federal Housing Administration (FHA), the White House and the Department of Housing and Urban Development (HUD) announced a reduction from 85 bps to 55 bps on FHA mortgage insurance premiums (MIP). While those in the industry celebrate this move, the average American home buyer may not be familiar with this jargon, and what it actually means
In a nutshell, it means buying a home just got more affordable!
But let’s break it down further…
What is FHA MIP?
To start, FHA loans are mortgages issued by a lender (like MiMutual Mortgage) and insured by the federal government. FHA loans require lower minimum down payments than conventional loans and allow for less than perfect credit scores and history.
This type of loan is great for first-time homebuyers, lower-income borrowers, and those with little saved for a down payment. A key difference between FHA and conventional loans is that conventional loans charge Private Mortgage Insurance (PMI) with less than 20% equity and FHA loans charge a Mortgage Insurance Premium.
There are two types of Mortgage Insurance Premium (MIP); Upfront MIP and Annual MIP.
- Upfront means you will pay 1.75% of the loan amount, upfront, at closing.
- Annual MIP will be charged each month in your mortgage payment. This fee is calculated based on the term of your loan, the size of the loan and the amount of money you put down.
If you have at least 10% down at the time of your purchase, you’ll pay MIP for 11 years. If you have less than 10% down, you’ll pay MIP for the entire life of the loan. And it’s the annual MIP that just got reduced. Calculate the savings each year x the numbers of years you pay the fee and that = quite a bit of savings!
What is bps?
Bps are basis points. Basis points are a unit of measurement used in the finance industry to describe a fractional unit of a percentage. One basis point equals one-hundredth of a percent. (One bps = 0.01 percent).
So, when FHA announced a 30 bps MIP cut, that means annual Mortgage Insurance Premiums are now 0.30 percent less costly.
How does that add up?
According to the official statement from the White House, this reduction means:
- A family buying a home with a $200,000 mortgage will save $600 per year
- A family buying home with a $300,000 mortgage will save $900 per year
- A family buying a home with a $400,000 mortgage will save $1,200 per year
- A family buying a home with a $500,000 mortgage will save $1,500 per year
According to HUD, the median home price for the 4th quarter of 2022 was $467,700. With a 30-bps reduction, homeowners would see their monthly mortgage payment reduced by $116. If you have 15, 20 or 30 years left on your mortgage, the savings is significant!
Who can benefit from this savings?
Qualified FHA borrowers can take advantage of this reduction just in time for the spring and summer buying season. This reduction will take effect for mortgages endorsed on or after March 20th,2023 and applies to all FHA eligible property types.
Now may be the time to speak to a licensed Loan Officer to see how you can benefit through an FHA purchase or refinance loan.
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