The Federal Housing Administration (FHA) on Wednesday morning announced a 30 basis point reduction in the annual premium charged to mortgage borrowers. The cut, widely anticipated by the industry, will result in mortgage insurance premiums (MIP) of 55 bps for most borrowers, down from 85. 

What does this mean to you? The MIP cut will potentially reduce housing costs by an average of $800 for roughly 850,000 homebuyers and homeowners in 2023.

The mortgage insurance premium is the monthly fee homeowners with FHA-insured mortgages pay to insure their mortgages. The fee is paid on top of the monthly principal and interest payments. 

Essentially, MIP is an insurance policy required by the government on an FHA loan. Since the down payment on FHA loans can be as little as 3.5% of the total price, the government requires added financial protection.

“The purpose of mortgage insurance is to protect the lender, not the borrower,” says Brian Sullivan, the supervisory public affairs specialist for the FHA. “With FHA loans, the insurance is to protect the federal government in the event a borrower defaults on the mortgage.”

“FHA’s announcement strikes an appropriate balance between assisting homeowners and ensuring the capital reserve ratio and insurance fund remain 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. Mortgage rates have doubled over the past year, and home prices have increased more than 30 percent in some counties. 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.” Statement from the National Association of Realtors.

The premium reduction will take effect on March 20.