HUD Cuts Mortgage Insurance Payments

If you took out an FHA loan, your mortgage insurance payments are going down or going away.

If you took out an FHA-backed loan, your mortgage insurance payments are going down or going away, according to the U.S. Department of Housing and Urban Development (HUD). HUD has released a plan it says will save more than one million homeowners with Federal Housing Administration (FHA)-insured mortgages in excess of $1 billion annually in insurance costs. Homebuyers stand to benefit substantially, too, from a reduction in the one-time insurance payment paid at closing.

HUD plans to reduce the up-front insurance premium by one-third, cutting the premium requirement from 2.25 percent to 1.5 percent of the original loan amount. As a result, a family with a typical $100,000 FHA-backed mortgage will save $750; for larger mortgages the initial savings may be as much as $1,650. In addition, HUD will eliminate annual premiums after a homeowner has built 22 percent equity in the home. That will eliminate entirely FHA's annual premium of .5 percent (or 50 basis points) on all loans once homeowners build 22 percent equity. HUD isn't being revolutionary in doing this-- it's only following the lead of private mortgage insurance (PMI) cancellation legislation passed by Congress in 1998.

These two parts of the plan will save the typical FHA consumer an average of $1,500 over the life of a $100,000 loan, according to HUD. Under the third part of the Plan, current FHA borrowers will receive a refund on premiums paid when they sell their home or refinance their loan. Approximately 200,000 borrowers will be eligible for this refund in the first year.

FHA-insured loans have the following advantages. First, FHA down payments of three percent are typically lower than the minimum that many conventional loan providers require. FHA also permits homebuyers to use gifts from family members and non-profit groups to make their entire down payment, while conventional loans generally require homebuyers to come up with a portion of the down payment from their own funds. FHA's credit guidelines for qualifying can be more flexible, too.

HUD recently announced that the percentage of Americans who own their own home hit a record high 67.7 percent in the third quarter of 2000, exceeding the Clinton Administration's target of 67.5 percent set in 1995. There are now 71.6 million U.S. homeowners. HUD says that the insurance premium reductions will lower the cost of buying a home, and fuel further growth in homeownership. More than 80 percent of all FHA loans go to first-time homebuyers, and more than 40 percent to minority households. Last year, FHA insured nearly 1.3 million home loans with a combined value of approximately $125 billion.

Sources used to create this article include releases from the U.S. Department of Housing and Urban Development (HUD).