FHA mortgages will be cheaper, for a while at least

Here’s some potentially good news for anyone seeking a low-down-payment mortgage without high credit scores: The Federal Housing Administration is cutting its mortgage insurance premium charges, making its loans a little more affordable.

But be aware that it could be temporary. The Obama administration scheduled the reduction to take effect on new FHA loans insured on or after Jan. 27, but the Trump administration is being pressed to reverse it.

The premium reduction is not huge — just one-quarter of 1 percent off the previous charge — but it will lower FHA monthly mortgage payments at a time when the rest of the market is trending costlier, because of rising interest rates. Consider this scenario from Michael Zimmerman, senior vice president of MGIC, a major private mortgage insurer in Milwaukee.

Say you want to buy a $220,000 house. You have a 720 FICO credit score and a 5 percent down payment, resulting in a loan of $209,000. Before the cut in FHA fees, at typical interest rates, you’d have paid $1,153 monthly (exclusive of property taxes and hazard insurance) for an FHA-insured mortgage. The same loan with private mortgage insurance would have cost $2 more a month: $1,155.

After the premium reduction, however, the monthly cost for the FHA loan will be $45 cheaper than the conventional loan — a cost advantage of $540 the first year. For larger loans, the savings will be greater.

For first-timers who can’t come up with more than the minimal down payment for either FHA (3.5 percent) or conventional mortgages (3 percent), the cost differentials are even higher. For a $220,000 house, the FHA payment comes to $1,088.45; the conventional loan, $1,217.45, says Paul Skeens, president of Colonial Mortgage Group, a lender in Waldorf, Maryland.