Will FHA Loan Rates Stay Low in 2017?

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Many experts think that FHA interest rates could be in for some unpredictability in 2017. In the last decade, FHA loan rates have been competitive with conventional mortgage rates associated with prime loan programs backed by Fannie and Freddie.

The Federal Reserve plans to meet in February, and a critical non-farm payrolls report is due to be released soon. This will represent the first full monthly report since President Trump was sworn in.

Many believe that what happens in February could set the tone for mortgage rates for the year – both conventional and FHA rates.

Generally, there is economic optimism in the air. Unemployment dropped, the work participation rate is up, wages are rising, and the Dow recently went over 20,000 for the first time ever. All indications from the Federal Reserve and HUD point towards competitive FHA loan rates in 2017 and 2018.

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Current FHA Rates Remain Low

Markets are going to be watching to see if these trends continue in February. Higher wages and more people working heats up the economy and can lead to inflation, which can cause rates to rise. Also, the Fed could decide to raise rates again because of signs of strong economic data.

While it is true that better economic activity could lead to higher conventional and FHA mortgage rates, many would argue that this is a good thing.

If people are making more money and unemployment is lower, people can certainly afford slightly higher mortgage rates. Also, experts remind consumers to remember that mortgage rates are still historically very low. Even with rates in December 2016 at a three year peak, they were still very low:

  • Conventional: 4.14%
  • FHA: 4.02%
  • VA: 3.76%

The FHA mortgage was viewed as an especially good deal. FHA loans are used in about 40% of 1st time home buyer loans. FHA loans have very flexible lending standards and it is possible to put down as little as 3.5% on a home.

But what is the future going to bring?

Trump’s First Year on Office

One of the reasons it is hard to predict conventional and FHA rates for sure is that with a new president, things are more up in the air. Usually, when a president has been in office for a year or two, mortgage markets are easier to gauge. Most often, the non-farms payrolls and the federal open market committee meeting announcements early in the year give us a good idea of rates for the year.

But a new president coming into office with rather unknown economic plans tends to make the situation harder to weigh. Here is some of what we know:

  • Since he won in November 2016, the stock market has been going up, as have mortgage rates, although the latter are still low in historical terms.
  • The administration has stated it wants $1 trillion in infrastructure spending and tax cuts. It is unknown how much of this will become reality once the proposal works its way through Capitol Hill.
  • Interest rates usually increase in a higher inflation environment. Here’s why: Investors purchase more mortgage backed securities that come with a given rate of return. The rate that investors get is tied to the rate of your mortgage. Rates need to be higher than whatever inflation is. Prices in the economy today are increasing at 1.7% per year, according to the Consumer Price Index.
  • If inflation gets to 4%, you will not see 4% mortgages anymore, for FHA or anything else. A decade ago, FHA mortgage rates were over 6%.

Many, many eyes will be closely watching what the Trump administration is intending on its spending and tax plans. And even more importantly, they will be watching whatever makes it through Congress into law. If we see a stimulus and substantial tax reform, many experts believe we will see more economic growth and higher inflation. This could lead to higher mortgage rates.

Also, once it becomes clear what is going to be enacted into law, market will likely price in rising inflation if they think it is likely. This could cause FHA interest rates to rise faster.

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Federal Reserve Meeting to Discuss FHA Mortgage Rates and More

It also is instructive to review what happened at the December 2016 meeting of the Federal Reserve. The Fed voted to raise the benchmark rate by .50%. The hike alone did not affect mortgage rates though.

The market factored that hike into the rates as they stood in December. No, it was the prediction of three more rate hikes in 2017 that sent mortgage rates higher.

Remember that four times per year, the Fed issues projections for future increases in the Federal Funds Rate. Last September, it predicted two hikes for 2017. But in December, it said they would do another hike, which would in all total ¾ of one percent in total hikes to the Fed Funds rate by the end of 2017.

So, this put Wall Street on notice, and this is why we have seen an increase in rates on most mortgages lately.

Thus, if you are shopping for a low FHA loan rate this year, you should listen to what the Federal Open Market Committee states at its meetings. At the recent meeting in January, the Committee stated it was going to hold on the Fed Funds rate. The next meeting is in June, and some think at that meeting, they may announce more rate hikes.

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This could definitely be the case if it is clearer by then what Trump is doing on taxes and spending this and next year.

Also, keep an eye on the Non-Farms Payrolls report when it comes out. If it is showing stronger signs of economic growth, there is a good chance rates could inch up this spring.

The Bottom Line with Today’s FHA Rates

It is always complicated to anticipate where FHA interest rates will be in a few months. But generally if you see rising economic activity and rising inflation, rates are going up.

An FHA mortgage may insure an interest rate that is a bit lower than conventional rates, so even if rates go up a bit this year, you still are getting a very good deal. Remember, 30 years ago, people paid 18% interest rates! These days, you can easily get a rate well under 5% even in a rising market.

Updates on Mortgage Insurance Premiums and FHA Interest Rates

Many believe that President Trump and HUD Secretary, Ben Carson has an opportunity to stimulate the housing industry by reducing the rate for mortgage insurance premiums on FHA loans.  In recent article on Housing Wire, Rep. Joyce Beatty, D-Ohio was quoted stating, “At a time when home-ownership rates are at a fifty-year low, the federal government can do more to make becoming a homeowner more of a reality for countless families,” Beatty said. “Lowering FHA rates on mortgage insurance premiums will put hundreds of dollars back into homeowners’ pockets and also limit financial barriers for potential home buyers in the U.S. marketplace.”

The Chicago Tribune published a report stating the average fee for a 30-year mortgage was 0.5 point, unchanged from last week. The fee on 15-year mortgages also held steady at 0.5 point. Conforming and FHA interest rates on variable 5/1 ARMs fell to 3.15 percent from 3.18% last week. The fee remained at 0.5 point.  See Mortgage Rate Weekly Report.

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What You Need to Know About Mortgage Insurance on FHA Insured Loans

FHA-backed loans, which are guaranteed and backed by the Federal Housing Administration, are one of the most popular mortgage loans in the United States. FHA insured loans have very flexible credit and debt to income ratio criteria, no maximum or minimum income, and down payments as low as 3.5%.

So, what’s the down side? The only major disadvantage of FHA home loans is the requirement for paying a mortgage insurance premium or MIP. All FHA-insured loans have to have MIP no matter how much money you put down. Even if you were to put down 20% or more, you still have to pay MIP. This is because FHA needs to ensure that it has enough revenue available for when home owners default on their loans.

Many FHA home owners do not like mortgage insurance. But MIP, while not great, is not really that bad given the fact that without mortgage insurance, the FHA mortgage either would not exist or would have much tougher qualification criteria. Remember, your mortgage insurance payment ensures that the lender will get paid back most of the principal balance if you do not pay the mortgage. The MIP payment is why lenders can afford to take a higher risk on home buyers with lower credit scores and down payments.

There are two types of MIP on fixed rate FHA loans that you have to pay. The first is up front FHA mortgage insurance. This insurance premium is collected when you close the loan. It also can be rolled into the amount of the loan. The premium is 1.75 basis points of the loan amount. So, for a $100,000 loan, the up upfront premium is $1750. If you refinance your FHA loan within three years, you get a refund for the unused MIP that you paid up front.

The other is the annual FHA mortgage insurance premium. This annual premium is paid in part each month and is part of your mortgage payment. Will premium FHA rates rise in 2018 or fall? Nobody really knows for sure, but we anticipate that premium rates along with FHA interest rates will remain low.

For most borrowers who closed loans after July 3, 2013, you cannot cancel MIP after you have a loan to value of 78% or less. You have to carry the MIP for the life of the loan. You will pay MIP each year of .80 to .85 basis points, depending upon the LTV of the loan. So, for a $100,000 loan, expect to pay approximately $800 to $850 per year for MIP.

This is really a very good deal; the FHA yearly MIP used to be more than 1%.

How to Dump MIP on an FHA Loan

As noted above, if your loan was issued after July 3, 2013, you generally cannot cancel MIP. You must pay it for the life of the loan. HOWEVER, if you closed an FHA loan after July 3, 2013 AND put down more than 10%, you can remove your MIP payment after 11 years. If you put down less than 10%, you cannot remove MIP. In that case, your only option would be to refinance into a conventional mortgage. This would require you to pay closing costs and to have suitable credit and income to qualify.

If you closed your FHA loan rates between Dec. 31, 2000 and July 3, 2013, and have an LTV of 78% or less, you can cancel MIP. You need to contact your lender and request that your MIP be canceled.

Alternatives to FHA Loan Programs

If you really do not want to pay MIP, then you have to get a conventional mortgage loan and put down at least 20%. This is the best scenario when it comes to buying a home with a mortgage, however, and many people cannot afford it.

Another option if you are a veteran is to get a VA loan. This is a fantastic program with very low rates, 100% financing and no MIP or PMI payments.

Also, if you live in a rural area, USDA home loans are available. This program offers 100% financing and has lower mortgage insurance costs than FHA loans.

We understand that many home owners hate the idea of paying for mortgage insurance. But you do need to keep in mind that the FHA loan program allows millions of people to cease paying rent and to buy their own home. They can get a fixed rate FHA loan with 3.5% down with a very low 580 credit score. Also, the interest rates on the loans are extremely low. They are often lower than conventional rates. Further, you can have quite high debt to income ratios of as high as 41% for all of your monthly debt payments, compared to your gross monthly income.

When you consider all of these factors about HUD guidelines and FHA loan rates, we think that paying MIP is not a bad deal. It is recommended, however, to try to put down at least 10% if you can swing it. You can then request to cancel MIP after 11 years.