Rising FHA Insurance Raises Effective Interest Rate

Ronnie Richards of American Homestar Corp. tells MHProNews a report by HousingWire reveals while mortgage rates have hit record lows since the beginning of the year, the effective interest rate has not changed because the Federal Housing Administration (FHA) raised its insurance premiums due to its troubled emergency insurance fund, according to Dan Green of Waterstone Mortgage. On his blog, Green points out as a federal agency FHA has to maintain $2 in reserve for every $100 it insures. As default claims rose between 2007 and 2011, the well was tapped so often that by Nov. 2011 FHA had only $0.24 per $100 insured, and had to raise premiums four times in the last year. The 0.50 annual mortgage insurance premium (MIP) of 2008 has risen to 1.50 in some high-cost cities, resulting in an “effective interest rate” of 5.50% based on a 30-year fixed rate loan with a mortgage rate of four percent. The good news, notes Green, is that MIP is temporary.

(Image credit: Federal Housing Administration)

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