Rising mortgage rates on FHA loans are driving up monthly payments, making it harder for many to afford.
FHA loans have long been touted as one of the most effective ways for first-time homebuyers to get a mortgage. But with rising interest rates — and a lingering threat of more — FHA borrowers are about to face more pain.
For home buyers, the difference between qualifying for a 3.5% down FHA loan and a 5% conventional loan is significant: about $150 per month on a median-priced home in the U.S., according to one analysis from mortgage data provider CoreLogic.
For people who already have a FHA loan, borrowers will likely see their monthly payments increase due to higher interest rates, which could hurt their financial situation if they don’t have other income streams coming in or an emergency fund set aside in case they lose their job.
If you purchased your home a few years ago, or even just last year when rates were at historic lows, you might be surprised to learn how much higher the rate is today.
The average 30-year rate on FHA-backed loans has risen from 3.97 percent in January to 4.68 percent as of this writing, according to data provided by Ellie Mae, an industry software provider.
That’s a rise of 0.71 percentage points in just six months, and it translates into higher payments for all new FHA borrowers:
$1,429 monthly on a $200,000 loan — an increase of $160 monthly or $1,920 annually
$2,073 monthly on a $300,000 loan — an increase of $239 monthly or $2,868 annually
$2,888 monthly on a $400,000 loan — an increase of $328 monthly or $3,936 annually
Each 1-percentage-point increase in mortgage rates is equivalent to a 10 percent drop in home affordability, according to Trulia.
“FHA buyers are going to get squeezed,” said Jed Kolko, chief economist at Trulia. “They’re going to have higher house payments.”
The rate spike isn’t the only problem facing borrowers with FHA loans right now. Insurance premiums are also expected to rise in coming years — and those increases will hit people who took out their mortgages before the hikes were announced.
The average interest rate on 30-year fixed-rate mortgages increased from 4.20% in March to 4.37% in April, according to mortgage finance agency Freddie Mac (FMCC).
Meanwhile, the average rate on 15-year fixed-rate mortgages rose from 3.43% in March to 3.57% in April.
Just a few months earlier, rates were hovering around 3.5 percent. Homeowners with ARMs are also feeling the pain of higher rates, though the impact will be somewhat less immediate.
The reason for the increase is simple: The Federal Reserve has been raising short-term interest rates as the economy improves and unemployment levels drop.
It’s also winding down its monthly bond purchases that have kept mortgage rates at historic lows.
Moe Bedard is the founder and lead mortgage analyst for LoanSafe.org. Since 2007, LoanSafe has helped over 2 million consumers with solutions to their mortgage problems and has been featured in the New York Times, LA Times, Fox Business, and many other media publications.