Today, January 8, the President visited my alma mater, Central High School in Phoenix, Arizona. He announced a plan to increase homeownership. The Federal Housing Administration will change the FHA annual mortgage premium from 1.35% to .85%. So, a future FHA mortgage payment will be cut by .5% or ½%.
Until FHA puts the change in writing, the annual mortgage premium stays at 1.35%.
The annual mortgage premium is mortgage insurance that a borrower pays for obtaining an FHA insured loan. The premiums are used as capital reserves for outstanding FHA mortgage guarantees. There is also a one-time mortgage insurance fee a borrower pays when obtaining an FHA loan. That fee stays the same.
The monthly saving for most borrowers purchasing a single family home in the Phoenix area would be $70 per month.
According to data obtained through the Arizona Multiple Listing Services, Inc., the median FHA mortgage amount for purchasing a single family home in December 2014 in Greater Phoenix was $168,000. Below is table comparing a FHA loan of $168,000 with the old and new mortgage premiums.
I estimate this change will increase overall single family sales by 2%-5%. Most likely at the lower end of this range. This estimate assumes the change applies not only to first time homebuyers, but also boomerang buyers.
The change benefits buyers only in certain price ranges. The maximum FHA loan amount is $271,050 in Maricopa County.
Today’s announcement will increase buyer activity. Media attention on the President’s plan will cause some potential buyers to contact real estate agents and lenders to find out more information. This is a good thing.
This move most likely will stimulate the refinance market more than it does the purchase market. This is why: If a borrower’s current FHA interest rate is 4.0% and their monthly premium is 1.35% they are paying about 5.35% interest on their loan. (It does not quite work out to the aforementioned but is close enough for an example). If a borrower refinances to an FHA interest rate of 3.5% and now their mortgage insurance premium is .85% they are now paying 4.35% on their loan or 1% less. Paying 1% less will encourage a mini FHA refinance boom.
Today’s cut of .50% in the annual premium will be muted if the mortgage interest rate goes up .50%.
There may be some opposition to today’s announcement. There was a reason for the premium to be 1.35%. As mentioned earlier these premiums are used as capital reserves for outstanding FHA mortgage guarantees.
The last time the President was in Phoenix, August 2013, I was on channel 12 Brahm Resnick’s show Sunday Square Off discussing the President and the Phoenix real estate recovery.
| Loan amount | $168,000 | $168,000 | Monthly saving | Yearly saving |
| Annual mortgage insurance premium | 1.35% | .85% | ||
| Annual amount | $2,268 | $1,428 | ||
| Monthly payment (annual amount divided by 12) | $189 | $119 | $70 | $840
(12 months x $70) |
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