The recent announcement that mortgage insurance premiums for Federal Housing Administration mortgages will decrease from 1.35% to 0.85% is welcome news for the mortgage industry, according to a new post from the Urban Institute.
“Existing homeowners who refinance into an FHA mortgage will see similar reductions to their mortgage payments as well,” said a statement from the White House at the time of the announcement. “In total, this action will help millions of families save billions of dollars in mortgage payments in the coming years, helping to support the housing market recovery.”
The FHA’s premium cut impacts the mortgage market in four ways in 2015:
1. Saving for borrowers
The Administration expects these lower premiums to save more than 2 million FHA borrowers an average of $900 annually. By other estimates, more than 3 million current FHA borrowers stand to benefit from reduced premiums upon refinancing.
2. Increases in low-income and first-time FHA borrowers
Low-income and first time borrowers, who seek homeownership but could not afford higher premiums under old FHA pricing, may now find the math more favorable.
3. Borrowers with high credit scores
Lower premiums will also make FHA loans more attractive for certain high-FICO borrowers who previously would have found GSE loans more cost effective.
4. Increase in competition between FHA and PMIs
Perhaps most significantly for the mortgage market, this premium reduction alters the current industry dynamic by making FHA pricing more competitive relative to PMI.