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A parting gift from HUD Chief Julian Castro: An FHA fee cut

By JEFF LAZERSON / CONTRIBUTING COLUMNIST

Count yourself in with a reduced monthly Federal Housing Administration mortgage premium as long as your FHA purchase or refinance loan funds on or after Jan. 27.

The U.S. Department of Housing and Urban Development announced Monday a quarter-point decrease in the FHA monthly mortgage insurance premium.

For most borrowers, this means going to 0.60 percent, down from 0.85 percent. For example, on a $600,000 mortgage, instead of paying $425 per month, you pay $300 per month, which saves you $125 per month. Holy Smokes!

This makes FHA very competitive with conventional mortgage insurance for all borrowers, not just those with mid-600 or lower credit scores.

For an FHA refresher, the maximum FHA loan amounts for Orange County are: $636,150 for one-unit, $814,500 for a duplex, $984,525 for a triplex and $1,223,475 for a four-unit building.

You must put at least 3.5 percent down and be owner-occupied when purchasing, with a minimum credit score of 580. From 500 to 580, a down payment of 10 percent is required.

Upfront, you are charged 1.75 percent of the loan amount, which can be added to the loan balance or bought out by accepting a slightly higher interest rate. This is in addition to the monthly mortgage insurance premium.

If you are refinancing an FHA loan and pulling cash out, your maximum cash-out amount is 85 percent of the value of the property.

You can do a regular FHA full qualifying refinance in which you must have just 2.25 percent equity before any upfront mortgage insurance premium is added.

For FHA rate reduction refinances or streamline refinances, no equity is need and no appraisal is required. You must have at least six months of on-time payments and reduce your payment by at least 5 percent for this type of loan.

If you put more than 5 percent down on a 30-year FHA loan or have more than 5 percent equity in the case of a refinance, the monthly mortgage insurance drops to 0.55 percent.

By comparison, private mortgage insurance (for conventional Fannie and Freddie loans) is risk-based, which means the monthly insurance premium you pay depends largely on your middle credit score and some other criteria. The FHA mortgage insurance is largely a single percentage.

Most FHA loans originated after June 3, 2013, require payment of the monthly mortgage insurance for the life of the loan.

Private mortgage insurance may be removed after two years of on-time payment history and equity reaching 25 percent (some Orange County properties appreciate quickly).

Or, under the Homeowners Protection Act of 1998, mortgage insurance must be removed after the loan is paid down to 78 percent of the original value and the borrower has paid on time.

The fee reduction still is subject to review by the incoming administration. And low down payment or low equity refinancing is incredibly complex when trying to compare pricing, payments and, most importantly, your approvability.

Get educated by a mortgage professional. Shop around to help you through this mortgage maze before making any decisions.

If you have questions or comments, please contact Jeff Lazerson by clicking here.

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