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Updated for the spring homebuying season - homebuyer mortgage assistance programs by state

MIP or PMI? The choice grows more difficult

The choice between a Federal Housing Administration (FHA) loan with upfront and annual mortgage insurance premiums (MIP) and a conforming loan with private mortgage insurance (PMI) is about to become more difficult for borrowers now that the FHA has announced some significant changes to its pricing and cancellation policies.

Mortgage lenders are urging borrowers to act before the FHA price increases take effect April 1. While those who can't avoid these changes might feel disappointed, FHA Commissioner Carol Galante assures borrowers that they're "essential and appropriate measures to manage and protect" the FHA mortgage insurance programs for homebuyers and homeowners.

Higher FHA mortgage insurance premiums

The annual MIP is set to rise by 10 basis points (0.10 percent) for most new FHA loans up to $625,500. Loans larger than that amount, known as jumbos, will see an MIP increase of 5 basis points (0.05 percent). FHA jumbos are available only in certain high-cost housing markets.

The new annual MIP will range from 0.45 percent to 1.55 percent of the loan amount depending on the size of the loan, loan term and loan-to-value (LTV) ratio. The LTV ratio is the loan amount expressed as a percentage of the home's value. The annual premium is paid monthly with the mortgage payment.

The annual premium increase amounts to approximately $13 a month for a $150,000 loan, according Lemar Wooley, a spokesperson at the U.S. Department of Housing and Urban Development. Stated another way, 10 basis points equals $10 for each $100,000 of the loan amount.

Neena Vlamis, president of A and N Mortgage Services, a mortgage company in Chicago, offers this example:

  • Purchase price: $250,000
  • Down payment (3.5 percent): $8,750
  • Loan amount: $241,250
  • Annual MIP per month at the old 1.25 percent rate: $251.30
  • Annual MIP per month at the new 1.35 rate: $271.41

That difference of $20.11 per month "isn't a deal-breaker" for most borrowers, says Vlamis. That's especially true for those who need an FHA mortgage because they have limited funds or less-than-perfect credit.

Paying for the life of the loan

And there's more. The FHA also announced that, beginning June 3, 2013, borrowers will be required to pay their annual MIP as long as they keep their loan, unless their initial loan term was 15 years or their initial LTV was less than 90 percent, which in both cases, the MIP could be cancelled after 11 years.

The current FHA policy allows most borrowers to drop MIP after five years with an LTV less than 78 percent.

The chart below shows the changes in the FHA MIP cancellation policy.

Term

LTV (%)

Previous

New

≤ 15 yrs

≤ 78

No annual MIP

11 years

≤ 15 yrs

> 78 - 90.00

Cancelled at 78% LTV

11 years

≤ 15 yrs

> 90.00

Cancelled at 78% LTV

Loan term

> 15 yrs

≤ 78

5 years

11 years

> 15 yrs

> 78 - 90.00

Cancelled at 78% LTV & 5 yrs

11 years

> 15 yrs

> 90.00

Cancelled at 78% LTV & 5 yrs

Loan term

The inability to cancel FHA mortgage insurance as quickly doesn't affect whether you can qualify for a loan, but will make your loan more costly over the long term.

That increased insurance cost might prompt more borrowers to choose a conforming loan instead of an FHA loan, says Julian Hebron, mortgage consultant at RPM Mortgage, a mortgage company in San Francisco.

While FHA mortgage rates typically are lower than conforming mortgage rates, a conforming loan could turn out to be cheaper than an FHA loan since PMI can be canceled sooner, Hebron says.

"It's at the discretion of the servicer as to when the PMI goes away, but traditionally it's between two and three years that you're eligible for review, if you've achieved 22 percent equity by pay-down," Hebron says.

Terms and conditions

The premium increase and stricter cancellation policy apply only to new loans, so current FHA borrowers will not be affected. Certain FHA streamline refinance loans, those with original dates before May 31, 2009 with original terms of less than 15 years will also see a premium decrease.

The FHA's upfront MIP of 1.75 percent is not changing.

The best way to really know whether an FHA loan with upfront and annual MIPs or a conforming loan with PMI is a better choice for you is to crunch the numbers. You can start by plugging some figures into HSH.com's mortgage calculator or PMI cost calculators. You should also consult a mortgage professional to compare these loan products based on your personal financial situation.

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