The government announced Thursday that first-time homebuyers taking out low-down-payment mortgages insured by the Federal Housing Administration would not have to pay as much in private mortgage insurance. This change is expected to save more than 2 million FHA homeowners about $900 a year and allow about 250,000 consumers to buy their first homes in the next three years, according to a news release from the U.S. Department of Housing and Urban Development.
Hundreds of dollars in savings makes a big difference in the finances for first-time homebuyers who couldn't afford to make a 20% down payment. It comes in the form of lower private mortgage insurance (PMI) premiums, which are required by lenders of low-down-payment mortgages. Before the housing market collapsed several years ago, PMI cost 0.55% of the loan balance, but the housing crisis seriously stretched thin FHA's resources — insuring lenders against loan defaults, which had skyrocketed — and higher PMI premiums were a result.
Before today's announcement, PMI included an annual premium of 1.35% of the loan balance. When the changes take effect near the end of the month, as HUD estimates, that premium will drop to 0.85%. FHA borrowers will still be required to pay an upfront fee for PMI, as well as pay PMI throughout the life of the loan, though there are ways to get rid of it.
FHA loans increase access to homeownership, which is why the loans and PMI rules are so important. At the same time, many borrowers don't realize how much PMI costs. In a May 2014 survey, TD Bank found that 65% of homeowners ended up dealing with higher monthly mortgage payments than they anticipated because of the added cost of PMI. If you don't see it coming, PMI can be a huge burden for homeowners who are already generally less wealthy than the average homeowner.
As significant as this change is in making homeownership more accessible, you still need to have a good understanding of how your down payment and financial standing will affect whether or not you can get a mortgage for the home you want. That's easy to figure out — with this free calculator, you can figure out how much house you can afford, based on your anticipated down payment and existing debt. It's a great way to get started on your way to the dream of owning your first home.
Your credit score will also have a major impact on your ability to qualify for a home loan and how much your monthly payment will be. You can check your credit scores for free on Credit.com.
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