What is Congress doing Now? Increases in Mortgage Insurance will Hurt the Recovery.

Remember on February 24, 2010 when Maxine Waters sparred with Ben Bernanke about how she felt increasing interest rates would hurt the consumer?

(Ok, their actually discussion was like watching people speaking different languages trying to get a point across to each other.. as the federal funds rate is not related to interest rates.. but I digress).

Regardless, her point was well taken. Keep interest rates low or it will hurt the consumer and housing market recovery. I whole heartedly agree, given everything else today.

Well, Congresswoman Waters of the House Financial Services Committee recently voted for HR 5072 which increases the Annual Mortgage Insurance Premium on FHA loans. This particular bill will raise the premium from the current .55% to 1.55%. What does a 1% increase mean? Let’s look at an example.

If you have a loan today for $200,000 and a 5% interest rate, your principal and interest payment will be $1,074. If you add the annual premium of .55% to that, you get an additional $92, or $1,166/month for your total payment.

Now, with the increase if you take that same loan of $200,000 and an interest rate of 5%, your principal and interest payment is still $1,074. However, when you add the additional annual premium of 1.55% to that, you get an additional $258 for a total monthly payment of $1,332.

That’s a $166 difference each month in your payment. That amount is equivalent to a 7.01% interest rate!

Now, why would anyone want to increase the Mortgage Insurance Premium on an FHA loan?

Well, the only thing I can figure is that when the Mortgage Insurance goes up, the government makes more money. But, when the interest rate goes up, banks make more money. Of course they want to favor increased Mortgage Insurance Premiums.

I urge you to talk to your representative and tell them your feelings on this topic. We need our housing market to continue to lead the country out of the recession.