Govt. to Increase FHA Down Payment & Costs Again? Should You Purchase Now?

With our elected officials proposal to increase the FHA down payment requirement to 5%, and FHA wanting to increase the monthly mortgage insurance premium to 1.5%, every prospective home buyer should be asking themselves is now a good time to buy and how would these increases affect me?  

Prospective home buyers often ask me if now is a good time to purchase a home with the intention to wait and purchase.  When I ask why, the most common reason is they want to see if home prices drop another $5,000 or maybe even $10,000.

To get the correct answer to the question if now is a good time to purchase is, you might want to be a little more concerned about the financing terms rather than waiting to see if home prices drop…….especialluy if you will be using an FHA mortgage to finance your home.

Here are three questions to ask yourself.

Question #1:

“Would you be bummed out if you waited 6 months in hopes that the home drops $5,000 and it turns out FHA increases the down payment requirement to 5% and now you need to come to closing with another $3,000?” (a $200,000 home purchase with 3.5% down is $7,000.  With 5% down it’s $10,000.)

Would you feel safer with an extra $3,000 in your bank account available for an emergency fund or to help furnish the home?  Or do you think it’s better to be sitting in your home equity doing nothing….not earning interest?  Will an extra $3,000 down payment protect you from default if you should happen to lose your job?  No.  If you had an extra $3,000 in your saving account and a ‘life’ event happened, would the cash be better used to pay for that event rather than borrowing to pay for it on an 18% rate credit card?  Consider the cost of tying up $3,000 in a down payment over 30 years.  What if yo invested that money into a mutual fund with 9% return and added nothing to it for 30 years.  It would compound interest and become about $40,000.

Are you aware that HUD/FHA has increased their monthly mortgage insurance premium (MIP) from .55% to 1.15% over the last year and a half?  That’s comparable to hiking the interest rate .6%.  You can see the impact on this type of MIP increase and see why they should care about these FHA monthly insurance premium increases.  Bottom line is FHA’s MIP increase is adding to the cost of the home.  Remember, FHA’s ultimate goal is to increase the monthly Mortgage Insurance Premium (MIP) to 1.5% in order to reduce how many people apply for an FHA mortgage.  FHA is gradually trying to make getting a loan through them painful…….similar to the anecdote of how best to boil a frog alive.

FHA wouldn’t want to make it more difficult for a home buyer to qualify for a home, would they?  Big yes! FHA is on record stating they want an even smaller share of insuring low down payment mortgages…..they want to help less than they have already.  This is a known goal of FHA.  It’s a supply demand thing….They will keep making it more expensive and/or more difficult to qualify until enough people stop applying for FHA loans.  They are hoping private investors will start offering loans again similar to the days between 2002 -2008…..but that will never happen… least not for a long long time.

Question #2:

“Are you OK with the MIP rate possibly going up another .35% while you are waiting for a home to drop $5,000 in value?  Do you know how much this .35% increase will affect your monthly payment?” Answer: It would raise your payment another $59/month (based on a $202,000 loan amount).

Question #3:

“Would you still want to purchase 6-9 months from now if your mortgage rate was .75% to 1.5% higher?” A 1% interest rate increase on a $202,000 loan increases the monthly payment by about $125.   Over 30 years, that results in paying about $45,000 more for the home.

I think we can agree that waiting to purchase due to hoping home price drop another $5,000 and possible paying $45,000 more as a result of mortgage rates going up 1% is not a ‘win’ situation.

Then, consider the additional $59/month increase due to the .35% MIP increase that is probably right around the corner.  If or when both happen, you could end up paying $184 more per month for a home that you waited to drop $5,000 in sales price.

If you want to purchase before FHA starts increasing the down payment and increase the monthly mortgage insurance rate again, call me and we”ll consider and analyze all the loan options available to you.

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