Smart Borrower Blog

Cost of FHA Loans Set to Rise


Mar 28th, 2011 @ 4:13 AM by Debbie Dragon


Ever since the housing market bubble burst, FHA loans have been in high demand. With tighter lending standards in place for conventional loans, more people have no other option other than an FHA backed mortgage. While FHA loans are still only made available to credit worthy applicants, the criteria is not quite as stringent. Applicants need only put 3.5 percent for a down payment, making these loans in reach for many first-time homebuyers.

Due to the high demand of these loans, the FHA has eaten through their reserve funds. What is supposed to be a 2 percent reserve cushion has dwindled to just 0.5 percent. As a result, FHA loans will now come at a higher price tag for consumers. Starting on April 18, all new FHA loans will see a 0.25 percent increase in insurance premiums. For current FHA loan holders, premiums will stay the same.

Insurance premiums are added to loans in order to protect the lender. If one were to default on a loan, the money  paid in insurance premiums would help cover the loss.

New 30-year fixed-rate FHA loans will carry an insurance premium between 1.1 and 1.15 percent and 15-year fixed-rate FHA loans a premium between .25 and .50 percent. The rate varies depending on the loan amount.

An article on the Wall Street Journal breaks down how the increases will affect monthly payments:

“If you have a $175,000 loan balance (the average for FHA loans), for example, you’ll pay an extra $23 a month,”  says Bob Ryan, the FHA’s deputy assistant secretary for risk management. “With a $200,000 loan, you’ll likely pay around $30 extra. For a $100,000 loan, it’s about an extra $15. Monthly premium payments will decrease as your loan balance drops.”

In addition to the monthly insurance premium, FHA loans also require a 1 percent upfront insurance premium fee. This premium is generally rolled into the cost of the loan so the loan holder does not have to foot the money up front.

Insurance premiums are very typical in the mortgage industry and not just FHA loan holders pay them. Conventional loan holders are also required to pay mortgage insurance when a home loan is more than 80 percent of the home’s value.

About Debbie Dragon
Debbie Dragon is a full time freelance writer and the co-owner of ReliableWriters.com.

One Response to “Cost of FHA Loans Set to Rise”

  1. oh yes after the bubble markets, it is normal that increases the cost of borrowing.

    Excellent blog

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