- - Thursday, March 29, 2012

Over the last couple of weeks, I have reported that the Federal Housing Administration (FHA), as of June 12, will drastically reduce the fees for certain FHA streamline refinance programs.

This clearly is great news for eligible borrowers because high fees often offset the benefit of refinancing for a lower interest rate.

At the same time, however, the FHA is increasing its fees on purchase loans. Whether this is being done to offset future losses or something else, I cannot tell you, but a new FHA loan is not nearly as good a deal as it used to be.

As of April 9, the annual mortgage insurance premium (MIP), paid monthly by the borrower, increases from 1.15 percent to 1.25 percent of the loan amount. The upfront MIP (UFMIP), which must be paid in cash or added to the borrower’s loan amount, increased to a whopping 1.75 percent from 1 percent.

This morning, I ran some numbers for a first-time homebuyer named Erin, using the new FHA fees. She is looking for homes in the $280,000 range, and she has $16,000 in savings. Let’s dissect the details of a hypothetical FHA loan.

FHA requires a 3.50 percent down payment. Erin would use $9,800 of her savings for the down payment, leaving a base loan amount of $270,200.

Erin doesn’t have enough money to pay the UFMIP of $4,729 (.0175 x $270,200) from her savings, so it would be financed into the loan, making the amount she borrows $274,929.

FHA rates are low - at least seemingly low. With no points, Erin can expect a 30-year fixed-rate loan close to 3.75 percent. The monthly principal and interest (P&I) payment with that rate is $1,273.

The annual MIP is 1.25 percent, adding $281 to the monthly payment, making her payment $1,554, excluding taxes and insurance, which will remain the same regardless of the type of mortgage she obtains.

Is this a good deal? Let’s see. Without any MIP or UFMIP, Erin would have a $270,200 loan at 3.75 percent. Her monthly P&I would be $1,271. Instead, she’s paying $1,554 to cover the annual MIP and she’s more in debt to the tune of $4,729 to cover the UFMIP.

Let’s express this as an interest rate, without the UFMIP. A P&I payment of $1,554 on a loan amount of $270,200 equates to a 30-year fixed-rate mortgage of 5.61 percent. Including the UFMIP in her loan balance, a $1,554 P&I payment would result in a rate of 5.46 percent.

Numbers don’t lie, folks. FHA loans are back to being lousy deals for purchases. Looking quickly at its closest competition, which would be a conventional loan with a 5 percent down payment, I would be offering a 30-year fixed-rate loan of about 4.75 percent with no points and no MIP payment.

Under this scenario, Erin would have to come up with a $14,000 down payment instead of $9,800, but her loan balance would be $266,000, saving her the $4,729 UFMIP. And her P&I payment would drop to $1,388, instead of $1,554.

My advice to Erin is obvious. If at all possible, try to scrape up the extra 1.50 percent, or $4,200, and go with a conventional loan. Even though FHA requires only a 3.50 percent down payment instead of a 5 percent down payment, the FHA deal is a ripoff.

I doubt the FHA is going to have a lot of takers with these new numbers. Maybe that’s its intention. Meanwhile, if you currently have an FHA loan, you might be in for a great refinance deal as of June 12.

Send email to henrysavage@pmcmortgage.com.