All over the news the past couple of days has been the fact that President Obama announced a cut to the FHA Insurance Premium. Rhetoric from both sides of the isle may have you confused as to what this means, whether you are in the real estate market or not.

A FHA loan, is simply a loan that is INSURED by the FHA (Federal Housing Authority). FHA guidelines are such that allow lower down payments and more flexibility on basic qualifications than traditional lenders. Typically, whenever you put less than 20% down, you must acquire mortgage insurance. Even if you were not getting a loan insured by the FHA, you would still need to purchase mortgage insurance. Mortgage insurance is typically priced as a percentage and added onto your payment every month.

For example. If you had a loan that was only 10% down through Chase Bank you would need mortgage insurance. Your interest rate on a 30 Year Fixed may be 4%, but the mortgage insurance premium might be .7%. Therefore, at the end of the day, your effective payment would be 4.7% (now these are very simplistic terms as it is a bit more complicated than this, but this is the basics of it).

FHA Insurance has been considerably higher than standard mortgage insurance. The result of this has been those who would normally get an FHA loan have decided not to and instead go with a loan that only requires private mortgage insurance, provided that they can qualify for such a loan. What are the FHA Premiums and what will be the new premiums?

The old FHA premium was 1.35%. Yes, that’s right, 1.35%. That means that if the lender gave you a rate of 4% on your FHA insured loan, then your effective rate, with the FHA insurance would end up being 5.35%. On top of this monthly premium, FHA also requires an up front premium of 1.75% of the total loan value. Meaning that if the loan value was $100,000 then you would have an additional cost at closing of $1,750.

The new FHA premium that will be introduced will be cut by .5, meaning it will now be .85%. This is a big difference as it now puts FHA within the realm of private mortgage insurance (but still at the high end of it). The 1.75% up front premium, however, is not slated to go away.

At the end of the day this means that the average FHA borrower will save roughly $900 per year. While it is not a lot of money, for first time home buyers that $75/80 per month could help push them off the fence from renting to buying.

At the end of the day, this means that there are more options for borrowers today which will hopefully mean more buyers will enter the market to help continue the growth of a stable, healthy real estate market.

Paul Blackburn is an Illinois licensed Realtor and Broker with @properties. He can be reached anytime via e-mail at Paul@PKBlackburn.com