Of the three government-backed mortgage programs, the FHA loan is by far the most popular. There are no income limits for FHA loans, the property can be located pretty much anywhere anyone can access the program. The government guarantee with FHA loans provides that should the borrower ever go into default the lender will be compensated for the loss. As long as the loan was approved using standard FHA guidelines, the guarantee will apply.
This guarantee however isn’t free. In exchange for allowing a down payment as low as 3.5% of the loan amount the borrowers pay for a mortgage insurance premium. With FHA loans, there are two such premiums, one upfront and an annual premium paid in monthly installments. Today, the upfront premium is 1.75% of the amount borrowed. If the FHA loan is say $300,000 the premium is $5,250 which can then be rolled into the loan amount for a final loan of $305,250. Your principal and interest payment will be based upon the higher amount. FHA mortgage insurance, like other mortgage insurance may be tax deductible for those who itemize, as well.
The annual premium for FHA loans is now 0.85% of the outstanding loan balance. Using this same example, the premium for the first year is $2,594, or $216 per month. This is an amount that is added to the principal and interest, tax and insurance payment made each month. Mortgage insurance for FHA loans made before June 3, 2013 and you feel your current loan balance is at or below 78% of the original purchase price you can request to have your FHA mortgage insurance premium cancelled. For loans that were opened after this date, the premium is permanent. However, when borrowers suspect their balance is at or below 78% it might be a smarter move to refinance to a conventional loan that doesn’t require any form of mortgage insurance, either upfront or annual, at the 78% level.
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