There's some good news on the horizon for buyers struggling to afford a house.
On Wednesday, the Biden-Harris administration announced a reduction in the mortgage insurance premium charged on loans backed by the Federal Housing Administration. The change is set to go into effect on March 20 and is expected to shave an average of $800 per year off mortgage payments for new buyers and current homeowners still paying off eligible loans.
What it means for you
The mortgage insurance premium (MIP) on FHA loans will be reduced by 0.30 percentage points, from 0.85% to 0.55% of the loan amount. MIP is a required fee that is designed to protect mortgage lenders in case a borrower falls behind or defaults on the home loan.
Here are some of the big takeaways from the change:
- Lower insurance premiums will make homeownership more accessible to middle and low income borrowers.
- It is estimated the change will benefit up to 850,000 homebuyers and homeowners this year.
- Borrowers will save an average of $800 per year on their monthly mortgage payments.
- Some buyers may be able to save up to $1,500 per year, depending on their location and the loan amount.
Examples of potential savings in different cities
- Detroit, Michigan: A buyer purchasing a home with a $200,000 mortgage will save $600 per year.
- Cincinnati, Ohio: A buyer purchasing a home with a $300,000 mortgage will save $900 per year.
- Phoenix, Arizona: A buyer purchasing a home with a $400,000 mortgage will save $1,200 per year.
- Atlanta, Georgia: A buyer purchasing a home with a $500,000 mortgage will save $1,500 per year.
Why it matters
The housing market has been extremely challenging for borrowers over the last three years. Inventory shortages, high home prices and bidding wars that were the hallmark of the pandemic housing market made it more difficult for many borrowers to find a home they could afford. More recently, potential homebuyers have been facing a new challenge with mortgage rates that are almost double what they were a year ago.
The MIP reduction is an additional step in the Biden-Harris administration’s efforts to increase the opportunity for homeownership for potential buyers who may not have the resources to make a sizable down payment or afford the monthly costs of a home loan.
The move is especially important for first-time homebuyers, who make up more than 80% of all FHA borrowers. People of color, who lag behind in homeownership rate compared to white buyers, make up more than 25% of FHA buyers.
Other recent initiatives include changes to underwriting policies that allow lenders to consider a positive rental payment history when determining a borrower's creditworthiness, increasing access to housing counseling services and changing the way student loan debt is evaluated during the application process.