The Federal Housing Administration recently announced an increase in their monthly insurance premium (MIP), starting April 18, 2011. While FHA loans are a great way for buyers to purchase a home with only 3.5% down, an increase in the MIP will affect your monthly payment. Consequently, this affects the maximum loan amount you can afford. Let’s take a closer look at the math related to this increase.
How is the FHA MIP calculated?
The premium is calculated by basis points. A basis point is equal to 1/100 of a percent. So, if you had 50 basis points, this would equate to 90 / ((1/100)/100) = .0090. FHA has predefined the amount of basis points and this is the number that is increasing after April 18th, 2011. See the chart below for the increases in basis points (bps).
How do I calculate how much more I will pay after April 18, 2011?
Let’s take a look at the example that the FHA memo provided:
In both cases, you have the same sales price, downpayment, and mortgage amount. You’re FHA Annual MIP is calculated based on the mortgage amount and the basis points in the first chart.
For the October 2010 example, you would be paying 90 bps. This means your annual premium is $157,295 x .0090 = $1415.66. Your MIP would then be $1415.66 /12 = $118.
For the April 2011 example, you would be paying 115 bps. This means your annual premium is $157,295 x .0115 = $1808.89. Your MIP would then be $1808.89 /12 = $151.
In this example, you would have to pay approximately $33 more per month.
So, if you’re thinking about getting an FHA loan after April 18, 2011, make sure you take into account these increases when determining how much of a monthly PITI payment you can make.