A reduction in mortgage insurance rates will save FHA borrowers...

A reduction in mortgage insurance rates will save FHA borrowers money.  Credit: Bloomberg/Dustin Chambers

Long Island homebuyers who use federally insured mortgages will save on their mortgage payments under a policy change the White House announced.

The Federal Housing Administration, which insures loans to homebuyers with smaller down payments, said it will lower the amount it charges annually for mortgage insurance by three-tenths of a percentage point to 0.55% of the total mortgage amount, effective March 20.

For example, a Long Islander buying a home for $500,000, with a 10% down payment and a $450,000 mortgage would save $1,350 a year — over $100 a month — because of the lower premium. Their annual cost for mortgage insurance would be $2,475, or 0.55% of the mortgage.

The policy change provides an upgrade to a loan program that is designed to help lower-income families, Vice President Kamala Harris said Wednesday afternoon during an event at Bowie State University in Bowie, Maryland.

What to know

  • The Biden administration said this week it will lower mortgage insurance premiums on home loans insured by the Federal Housing Administration, effective March 20.
  • The loans have more lenient credit requirements and the premium cut will help first-time buyers, who make up about 80% of FHA borrowers.
  • On Long Island, where home prices are higher on average than the rest of the country, the change could save FHA borrowers $100 to $200 a month, depending on mortgage size. 

"A home represents financial security, the opportunity to build wealth and equity that can help put your child through college, afford retirement, create intergenerational wealth within your family," she said.  "That’s what all of this represents. It is so much bigger than a piece of property."

Long Islanders looking to purchase their first home have faced steep price increases in the years following the start of the COVID-19 pandemic, and last year they saw mortgage rates double, which significantly increases monthly housing payments. A shortage of homes for sale has kept prices high despite higher mortgage rates, which typically lead to lower prices.

FHA loans help buyers borrowers buy homes who might not qualify based on their finances for other types of mortgages. Mortgage insurance protects lenders if a borrower fails to keep making payments on the home loan. Borrowers with certain credit scores can qualify for loans with a down payment of as little as 3.5% of the sale price.

Among U.S. home sales, nearly 12.5% of purchases in the third quarter of 2022 were made using an FHA-insured mortgage, according to the U.S. Department of Housing and Urban Development. The Biden administration noted more than 80% of FHA borrowers are first-time buyers.

Non-white borrowers make up a greater share of FHA loan recipients than other types of loans. In 2021, non-white borrowers made up 49% of FHA purchase loan recipients compared with 34% of purchase loan recipients across all loan types, according to the latest data available from the nonprofit Urban Institute.

 FHA loans generally have more lenient credit requirements than conventional loans, which aren’t insured by the federal government. But the mortgage insurance requirements are also stricter. Borrowers who put at least 10% down must pay mortgage insurance premiums for 11 years, while those putting less than 10% down must continue paying premiums for the life of the loan.

Meanwhile, conventional mortgages require borrowers putting less than 20% down to buy private mortgage insurance, but homeowners can ask lenders to remove that requirement once they reach 20% equity in their homes. 

In November, the federal government raised the maximum amount for an FHA-insured mortgage on Long Island over $1 million for the first time, to $1,089,300.

 For Long Islanders buying in high-priced areas, the insurance cut is even more valuable, said Andrew Russell, owner and founder of mortgage broker RCG Mortgage in Hauppauge. On a $700,000 mortgage, the new policy reduces premiums by $2,100, or $175 a month. 

"Right before the spring buying season, this is definitely a gift to first-time buyers," said Russell, who estimated about one-third of his clients are FHA borrowers and said that share could increase because of the change.

On the other hand, recent mortgage rate increases are increasing buyers' monthly costs and having the opposite effect of this change, Russell noted. The average mortgage rate for a 30-year fixed loan during the week ending Thursday was 6.5%, which was the highest since mid-November, according to Freddie Mac. 

The policy change was broadly cheered by mortgage bankers who had supported lowering mortgage insurance premiums.

“The lower premiums will expand homeownership opportunities by lowering mortgage payments for qualified FHA borrowers, providing critical relief from the steep rise in mortgage rates and home prices just in time for the spring buying season,” Bob Broeksmit, president and CEO of the Mortgage Bankers Association in Washington D.C, said in a statement. “This will especially help minority homebuyers and low- and moderate-income households who are predominantly served by FHA loans.”

Broeksmit noted that the Mutual Mortgage Insurance Fund, which the federal government uses to guarantee the loans, is in strong financial position. The White House said the fund’s reserves are more than five times the level required by Congress.

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