Decrease in Mortgage Premium Insurance

February 10, 2015

Decrease in Mortgage Premium Insurance

Decrease in Mortgage Premium Insurance

Last January 7, 2015 – in the efforts to expand responsible lending to creditworthy borrowers and increase access to sustainable rental housing for families not ready or wanting to buy a home, the Obama Administration is helping middle to lower class Americans to obtain their own home by reducing the Mortgage Insurance Premium from 1.35 percent to 0.85 percent. This step is an initiative in order to provide affordability and accessibility to families who are qualified for the said credit, especially to first time homebuyers. Some would predict that there will be an increase in the demand of the housing market since “decrease” would always mean something good. So how should it be any good? To help out with the math question, based on a simplified model – a borrower with a $100,000 30- year mortgage required to pay the FHA’s mortgage insurance could save an approximate amount of $25 (maximum) on their monthly payment. This is the net result of lower insurance premiums (known as MIP) and a higher mortgage rate.

But before we dig deeper into the news, it is best to learn more about mortgage insurance.

There are 2 different types of mortgage insurance and they are such:

Mortgage Insurance, which is bought from the government, designed for those with FHA (Federal Housing Administration) or VA (Veterans Affair). While on the other hand, there is a mortgage insurance bought from the private sector which is called private mortgage insurance or PMI). Insurance premiums are used as a safeguard in case the borrower defaults, the lender still gets paid by the insurance company.

Of course, there will still be either a negative or positive effect to any of the industry and based on some reports here are its effect:

Effects to Homebuyers -

Like what was mentioned, there were predictions or forecasts saying that the real estate industry will increase in terms of demand and sales. In an estimate, 2 million borrowers will be able to save an average of $900 annually over the next three years if they purchase or refinance homes. Back in 2011, the FHA has been increasing insurance premiums in order to offset losses caused by defaults on mortgages it backed after the housing bubble burst. Thus, families who wish to own their home especially those with lower-income have been locked out of the market for the past few years. But since the cut, this will expand the market and give them the ability to obtain their home. The FHA estimates that more than a quarter of a million first-time homebuyers will want to decide to enter the market after the reduction of insurance premium.

Effects to Competitors -

Will this affect the Private Insurance market? Having heard of the news, others would think that it will shake down private insurers. To be more factual, the decrease is designed to cater borrowers with credit scores of 700 or less. This will still be a modest competition between the mortgage insurance and PMI.

Effects to the Real Estate Industry -

The reduction will simply open doors to more potential buyers since trigger events such as new job (with the US economy growing steadily over the past few months), marriage (millennial buyers) and kids are the factors which most potential buyers consider when deciding upon buying a new home vs. renting. Of course, at least this will keep the real estate industry busy. But according to David Stevens, CEO of the Mortgage Bankers Association, he told CNBC that the “changes in affordability only impact how much home they can buy.” In effect, sure there will be increase in sales however; it depends on the price tag.

Effects to Sellers –

When there is a move with the homebuying trend, there is also a move on the selling side. However, just put in mind about what was mentioned above – it still depends on the price tag. So it does not automatically mean that the rate of increase to your potential buyers will be greatly affected, especially if the value of your property is beyond their budget as well as the probability of getting approved for a FHA/VA loan.

Whether or not the initiative to cut back on mortgage insurance premiums are good, that still depends on how you are going to look at it. The bottom line is this will help more Americans to own their home.

Sources:

http://time.com/money/3659411/obama-cuts-mortgage-insurance-premiums/

http://www.bloomberg.com/news/articles/2015-01-07/obama-said-to-announce-cut-in-fha-mortgage-insurance-premiums

http://www.housingwire.com/articles/32533-its-official-obama-to-direct-fha-to-cut-mortgage-insurance-premiums

http://www.nationalmortgagenews.com/news/secondary/no-cheaper-fha-premiums-dont-pose-a-threat-to-private-insurers-1043589-1.html