The Federal Housing Administration (FHA) recently announced plans to raise its monthly mortgage insurance, effective April 1, 2013. An overview of the proposed changes includes the following:
- The upcoming increase will be the fifth FHA increase to mortgage insurance premiums since 2009.
- The monthly mortgage insurance will be in effect for the life of the loan if the loan-to-value ratio exceeds 90 percent (which is the case on most FHA loans).
- If you put a 10 percent down payment on a home, the FHA will drop the mortgage insurance requirement to 11 years. Even with a down payment, you will still need to plan for paying mortgage insurance for at least the first 11 years of the loan.
So, what do all of these changes mean to you if you are in the market to buy a home in the Denver metro area this spring? Let’s take a look at how mortgage insurance affects your monthly mortgage payment and how qualified home buyers can take advantage of FHA loans to purchase their dream home.
The 411 on Mortgage Insurance
Many people, especially first-time home buyers, may not realize at first that there is more to buying a house than paying down the principal and interest of a loan. When figuring out how much your total monthly mortgage payment is going to be, you also need to consider the cost of monthly mortgage insurance, property taxes and home owner insurance. Typically, the less amount of down payment you put toward your home, the more likely it is that you will have to pay mortgage insurance. And, while the term may lead you to believe that you are insuring your mortgage, in reality mortgage insurance protects the bank that owns the mortgage from you. For instance, if you are ultimately unable to pay your loan back, mortgage insurance ensures that the bank gets paid off first for whatever you owe.
Calculating Your Total Mortgage Payment
When it’s all said and done, various taxes and charges each month can add up to 25 percent or more of what your mortgage payment is. For example, let’s say you buy a house in a Northwestern Denver suburb for $190,000 and you contribute a $15,000 down payment. If you get a 30-year fixed rate loan at 5.5 percent, your actual loan payment will be about $970 per month.
Even though you put some money down, you still will have to pay mortgage insurance, which could be around $90 per month. Homeowner’s insurance will be another $90, and property taxes can translate to another $100 per month. So, the initial $970 monthly now becomes $1,250 a month – a 28 percent increase from the simple monthly principle and interest payment. As you calculate what buying a home costs, you will find various online mortgage calculators that can help you figure out what your payment will be. If they aren’t factoring all of the expenses mentioned above, you will need to add approximately 25-30 percent to the amount of your home loan to get a good idea of what the monthly cost of buying a home will really be.
Advantages of an FHA Loan
An FHA loan is just one of many options that home buyers can choose from to finance their homes. An FHA insured mortgage may be used to purchase or refinance a new or existing 1-4 family home, a condominium unit or a manufactured housing unit. The two biggest advantages to using an FHA loan to finance your home is that these types of loans typically offer lower down payments than conventional loans and they can offer easier terms to qualify for a loan if you don’t have a high credit score or have experienced any past financial hardships.
But, even with these advantages, it’s important to take into consideration the mortgage insurance terms of an FHA loan, especially with the new changes that will take effect starting on April 1. As with any loan, it also is important to include all of the other costs associated with a mortgage when calculating how much of a house you can truly afford.
If you are ready to make an offer on your dream Denver area home this spring, make sure to consult a seasoned mortgage professional, as well as an expert real estate agent, who can help you find the right home and mortgage to fit your personal and financial lifestyle. Contact New Era Realty, your Denver metro real estate experts, today to get started.