FHA Increases Monthly Mortgage Insurance Premium - Again

Wednesday, March 9, 2011

For the second time in 6 months FHA has announced an increase in Monthly Mortgage Insurance Premiums (MMIP) for FHA loans. Right now the premium cost on a 30 Year Loan is .90% annually (.075% monthly) and as of April 18 the new rate will be 1.15% annually (.0958% monthly). That’s a .25% increase and will add about $20 per month to the payment on a $100,000 loan amount.

Why are they doing this? Well, the bottom line is that it is necessary to keep the FHA loan program viable. An FHA loan is actually insured by the Federal Housing Administration (FHA). This insurance covers the lender that made the loan in the event the loan ever goes into default (the homeowner stops making their payments and is foreclosed). The mortgage insurance premiums are pooled and used to pay for losses that occur due to loans that go into default. We all know that a lot of loans have gone into default over the past 3 years and these heavy losses could make it impossible for FHA to continue to insure loans.

In order to keep the FHA loan program viable and available FHA must ensure that it has enough MIP collected to adequately cover losses it incurs on bad loans and it has needed to increase the monthly mortgage insurance premiums to accomplish this goal.

The thing that most borrowers don’t understand about mortgage insurance is that the fact that it exists allows home buyers to get loans with significantly less down payment than would otherwise be available. If there was no such thing as mortgage insurance lenders would require all buyers to put down 20% and then it would take people forever to buy their first home. Mortgage insurance benefits home buyers because it makes low down payment loans available!


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