Man handing a tag marked discount to someone signing a paper

Lower mortgage insurance premiums to reduce costs for first-time buyers 

The government announced a plan to cut mortgage insurance rates by 0.3 percentage points, which could save eligible homeowners an average of $800 a year.

February 22, 2023
3 minutes

Key points:

  • The discount applies to FHA-insured mortgages and would benefit existing borrowers and first-time homebuyers who put less than 20% down.
  • An estimated 850,000 buyers and homeowners could see lower housing costs in 2023 once the reduction takes effect.
  • While many believe this change will improve affordability, there is some concern that easing credit costs could lead to an increase in home prices.

The federal government's decision to reduce mortgage insurance premiums is expected to save homebuyers and homeowners money, opening the door for more first-time buyers.

The Biden administration announced on Feb. 22 that the Federal Housing Administration will reduce its annual mortgage insurance premium by 0.3 percentage points. The government estimates this will save those who pay the insurance an average of $800 per year, lowering housing costs for an estimated 850,000 homebuyers and homeowners in 2023. The premium reduction will take effect on March 20.

From a mortgage perspective, it's a huge win for potential homebuyers, said Loralynne Ball, vice president of retail sales at Keller Mortgage.

Ball noted in an email that FHA loans are a key product for first-time homebuyers and this premium reduction will help them qualify for a broader range of homes. In higher-priced markets, Ball said the savings could be around $125 a month, which would mean someone could afford around $20,000 more on a home if they choose to use the savings that way.

"This is one step the government is making towards helping with affordability and it is a step in the right direction," Ball said.

National Association of Realtors President Kenny Parcell welcomed the move, saying it strikes an appropriate balance between assisting homeowners and ensuring the insurance fund remains strong.

"NAR has continuously advocated for responsibly reducing mortgage insurance premiums to help qualified home buyers struggling with affordability in the current environment, and we applaud the Administration for this action," Parcel said in a statement following the announcement. 

"In this competitive market, new and low- to moderate-income buyers are often left behind. This reduction will help alleviate some of the financial stress those potential buyers encounter when purchasing a home and allow more people across the country to achieve the American Dream of homeownership," he added.

When a buyer puts less than 20% down on a home, they'll typically need to pay a mortgage insurance premium until enough equity has built up. This most impacts first-generation homebuyers and first-time homebuyers of color — groups who are less likely to have sufficient resources for a sizable down payment due to a longstanding gap in intergenerational wealth transfers, according to a news release from the White House.

There is concern among a few that this reduction could lead to home price increases. Tobias Peter, an assistant director at the American Enterprise Institute, noted in a blog post that easing credit will not bring in new buyers because there are already too many buyers chasing too few homes. 

Instead, it may "cause the surplus of buyers to use their newly minted buying power to bid up the price of houses," Peter said in the blog post, adding that a better solution would be focusing on helping disadvantaged borrowers and neighborhoods reliably grow wealth by tying the premium reduction to shorter loan terms.

The announcement from the White House noted other recent measures the administration has taken to address housing stability and affordability, including changes to underwriting policies that make it easier for first-time buyers to qualify, and a Housing Supply Action Plan designed to boost supply and eliminate the housing shortfall in the U.S. within the next five years.

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