Mortgage insurance premiums increase soon

If you plan on buying a home with a Federal Housing Administration-backed loan (FHA), time is running out for you to close the deal before the monthly mortgage insurance premiums go up in October.

What this means to future borrowers is that on a $100,000 30-year mortgage with a 3.5 percent down payment your monthly FHA mortgage insurance premium will be about $70 instead of today's rate of $42.

The reason for the change is that the number of FHA-backed mortgages has jumped dramatically in recent years - and so have the defaults. The insurance pool covering the loses struggled, so Congress authorized the cap increase on the mortgage insurance premium. FHA mortgages are popular, in part, because of the lower down payment requirement.

While the monthly mortgage insurance premium has increased, Congress also lowered the up-front premium payment when you initially take the loan.

So, with mortgage insurance premiums going both up and down, how do you decide when to buy? It depends on how long you think you will be in the home.

If you plan to be in the home for more than four years, which most people do, then it makes sense to buy before the October mortgage insurance increase. Even though the up-front premium is higher, the lower long-term monthly payment will actually save you money after four years.

If you wait to buy a home after the new mortgage insurance premiums go into effect, you will save money in the short run. But after four years the savings you saw from the lower one-time premium will be eroded by the higher monthly premiums.