A change made in 2013 to the mortgage insurance premium structure of Federal Housing Administration (FHA) loans may have repercussions for borrowers who want to refinance with FHA when a new premium cut takes effect at the end of this month.
In 2013, FHA instituted a policy requiring that any loan originated with a loan-to-value (LTV) ratio of 90 percent or higher must carry mortgage insurance for the full term of the loan. FHA also deemed that loans originated with LTVs between 78 and 89 percent must keep mortgage insurance for 11 years.
FHA announced last Thursday that it would cut insurance premiums 50 basis points by Jan. 26. The U.S. Department of Housing and Urban Development (HUD) made it clear that the life-of-loan policy would remain in place.
HUD confirmed to Scotsman Guide News this week that borrowers with FHA loans that predate the life-of-loan policy would have to add it if they refinance with FHA. Before the life-of-loan policy, borrowers only had to keep insurance until they reached a 78 percent LTV, usually about 10 years.
“They would refinance at the lower premium level, but the life of loan would be added to that refinance,” HUD spokesperson Cameron French said.
For borrowers seeking to take advantage of low interest rates and a lower premium, the monthly payment could decrease, but the added cost of lifelong mortgage insurance could reduce their savings.