Recently a client sent me an article about how the FHA has reduced mortgage insurance premiums, and the result had been a 76.5 percent increase in refinance applications. Apparently mired in confusion, he asked if he could stop by the office and pick my brain.
After I responded in the affirmative, my client – we’ll call him Thomas since he asks so many questions – walked in a few minutes later and asked if I had heard about the reduction in mortgage insurance premiums. He fired a few more questions at me before I had a chance to respond, such as, “How do I know if I have an FHA loan?” and “Would it be worth it for me to refinance right now?”
Trying not to look incredulous about the fact that Thomas didn’t know what type of loan he had, I told him we could easily find that information. I let him know that the FHA had reduced mortgage insurance premiums from approximately 1.3 percent to 0.89 percent and that it could be advantageous to refinance if he had an FHA loan, because the mortgage insurance never goes away if the loan was originated on or after June 3, 2013.
“Wait, what?! I thought it dropped off automatically when the loan to value ratio hit 78 percent.”
“No, that’s only with conventional loans,” I replied. “With FHA loans that were taken out after June 3, 2013, it’s required for the life of the loan. Even with FHA loans with case assignment dates prior to June 2013, you have to pay mortgage insurance for a minimum of five years, then pay down the loan to 78 percent, and then apply to have the mortgage insurance waived.”
I continued: “The best option would probably be to refinance and get a conventional loan with a slightly higher interest rate so that we could eliminate that mortgage insurance. I could probably do that with no closing costs, no appraisals, and nothing added to your principal. This could be a particularly cost-effective option for you since the interest on your loan is tax deductible and the mortgage insurance is not, in most cases anyway.”
Thomas is the first to admit he doesn’t have a head for numbers. I could see his head was swimming when he asked why anyone would consider getting an FHA loan.
“FHA loans are good if that’s the only option,” I responded, “but it’s usually better to get a higher interest rate and avoid the mortgage insurance, especially considering that the monthly payments will often be lower. What happens sometimes is that people end up working with loan officers, who make a higher commission if they sell an FHA loan, instead of mortgage professionals like me, who make the same money regardless of what their clients choose.”
Be sure to check out my next article for more of my Q and A with Thomas, or contact me for help evaluating your financial situation.
Patrick Stoy has 15 years of mortgage lending experience. Patrick is CEO of Wilmington-based Market Consulting Mortgage, which he started in 2005 with a mission to build lifelong customer relationships by providing real value. To learn more about Marketing Consulting Mortgage, visit www.macmtg.com. Patrick can be reached at [email protected] or 910-509-7105.