How Does FHA Mortgage Insurance Premium Affect My Debt Service Cost?

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Some borrowers are put off by the FHA mortgage insurance premium. A good way to do an “apples to apples” analysis of different financing options is to compute the mortgage constant for each. The mortgage constant is the annual debt service cost including principal, interest and mortgage insurance.

FHA commercial mortgages have a longer amortization term than the competition. Most refinances have a term of 35 years and most new construction transactions have a term of 40 years – after the construction period. This extended amortization reduces the debt service constant.

Typical FHA Financing Options

 Mtg. Ins. PremiumNote RateTerm (Yrs.)Debt Svc ConstantComparable 30-yr. No MIP Note Rate
Tax Credit Refinance0.45%3.50%355.409%3.53%
New Construction0.65%4.00%405.665%3.91%
Tax Credit New Construction0.45%4.00%405.465%3.61%

The table above presents four typical FHA financing options. A straight refinance of a market rate property with a note rate of 3.50% and a mortgage insurance premium of 0.60% would result in a debt service constant of 5.559%. A 30-year term FNMA DUS with the same debt service constant would have a note rate of 3.75%. In this case, the cost of the MIP is not offset by the longer loan term and, if note rates are equal, FNMA DUS has a lower debt service cost.

However, if you look at the tax credit refinance, you will see that the equivalent FNMA DUS note rate is only 3 basis points higher. In the case of new construction deals, the comparable FNMA DUS rate would have to be lower than the FHA note rate. But this is academic since FNMA DUS doesn’t have a comparable construction loan program.

It also is important to consider that the FHA loan is fixed rate and fully amortizing. Balloon mortgages will require you to refinance regardless of market conditions at the time of the refinancing. If you are trying to sort out different financing options, call us for a no obligation “apples to apples” analysis.