The Federal Housing Administration announced last month that new FHA borrowers will see increased rates for the annual FHA mortgage insurance premium by a quarter of a percentage point .  The FHA mortgage insurance premium will rise to 1.1 or 1.15% the FHA loan amount for fixed 30-year mortgage rates and 0.25 or 0.50 for 15-year or shorter mortgage terms.

The increased insurance premium applies to FHA loans that are originated on or after April 18^th 2011.

FHA said the raise in insurance premiums is only modest increase that would not influence the borrower’s ability to afford the FHA mortgage.  A spokesman for the agency said, “The new changes are only a marginal increase and would have little impact on the affordability factors for most home buyers who would qualify for a new home loan.” But many mortgage industry experts have a different take. According to Josh Slemmons of the Mortgage News Post, “Borrowers who have little equity in their home need a FHA refinance, because the program allows refinancing to 96.5%.” Slemmons continued, “Many of these borrowers don’t actually save money because the higher insurance premiums can offset the lower FHA mortgage rates. The New York Times pointed out that many borrowers with less than perfect credit, may not benefit from mortgage rate refinancing, because the mortgage insurance increases their monthly housing expenses too much.

Will FHA mortgage rates continue to rise or can we expect the Fed to lower interest rates like they have done in the past?

The annual premium for 30-year mortgage was just changed in November, to 0.85 percent or 0.9 percent. Whereas previously borrowers only 0.50 percent or 0.55 percent.  iServe Lending’s Al Pereida said “The higher premiums equate to a quarter-point increase in interest.” FHA indicated that the new insurance premiums would raise the cost of the average $157,000 mortgage, by about $33 a month, or $396 a year. But borrowers residing in high cost regions like California, Florida, New Jersey New York, Virginia and Washington D.C. could be affected significantly.  For example a $475,000 California mortgage would see a monthly increase exceeding $100. In a struggling economy, paying $1,200 more a year could prove to be difficult for many borrowers in California. The agency requires that all borrowers of loans it insures pay the premium.

What if I already have a FHA mortgage in process?  The higher insurance premiums do not apply to FHA home loans that already in exist or that is in process and registered with a direct endorsed FHA underwriter.  The other FHA mortgages that will not be affected are the reverse home loans or home equity conversion loans.

The bottom line for loan applicants is that they must look at the whole picture (mortgage rate, insurance premiums and total monthly payments) and assess the benefits of refinancing or home financing with FHA.  Borrowers can’t just look at a lower FHA interest rate and assume the savings. Needless to say, the next month will likely see a huge spike in loan applications volumes because many consumers will be rushing to get their FHA loan in process before HUD imposes the higher insurance premiums.  The higher insurance premiums will likely have an adverse effect on the FHA streamline program as well because lower FHA rates won’t necessarily translate to lower monthly payments.  If you are considering buying or refinancing with FHA loan, we recommend you act fast getting your loan in process with an approved FHA lender before the deadline passes.