HUD Increases Up-Front Mortgage Insurance Premium

In keeping with a general tightening of it’s lending rules to compensate for elevated default rates, HUD has announced an increase in the “up-front” mortgage insurance (MI) for FHA loans from 1.75% to 2.25%. As you know, mortgage insurance on FHA loans is normal split into two parts.  One portion is added to the monthly payment, and the other is added to the loan amount.  Allowing buyers to finance a portion of the MI has the effect of keeping payments lower than they otherwise would be on a similar conventional loan.

While the increase has some people concerned, let’s take a second and put things in perspective.  On a $200,000 loan, the financed portion of the MI increases from $3378 to $4343, so your loan balance grows by less than $1,000.  The resulting increase in the monthly payment (I’m using a 5% interest rate) is less than $5.

However, if you’re buying up to the $417k limit and the payment increase is critical, then you’ll want to be in Contract on a home by April 4, 2010, and make sure your lender has pulled your FHA case number before April 5th when the new rule goes into effect.