In an attempt to increase activity in the real estate market, the Federal housing administration will make it easier for Americans to purchase a home by reducing the cost of private mortgage insurance. The current rate of 1.35% of the loan amount will be reduced to 0.85%. The new regulation is expected to go into effect towards the end of January 2015. Home buyers who refinance into a FHA loan may also see significant savings. The government predicts that the monetary savings will allow hundreds of thousands of consumers to buy a home. Many Americans have been unable to buy a home in the past few years due to strict lending requirements.

Private mortgage insurance is meant to protect the lender in case the borrower defaults on the loan. PMI is required of FHA loans due to the fact that most require minimal down payment which makes them riskier. Once the balance is reduced to 80% of the value of the home the home owner has the ability to cancel PMI. The FHA program is frequently utilized by first-time home buyers and those who don't have a large down payment. Borrowers, up till now, were required to cover private mortgage insurance fees.

Lenders have been hesitant to give out loans to consumers with less than stellar credit scores due to heavy penalties by the government in case of underwriting errors. As a result credit requirements are stricter than ever before and many many American families had been phased out of the housing market. Other experts don't believe that this new policy will have a significant impact on market activity.

Critics of the plan worry that the FHA may not have enough funds to withstand sudden turmoil in the housing market meaning that taxpayers may have to pick up the slack in the future with a bailout. Others feel that the government should be minimizing its involvement in the mortgage industry.

Homebuyers can expect to save a significant amount of money thanks to this reduction. A home buyer may see savings up to $900 annually. The typical amount of savings on a $200,000 on home purchased with 30-year mortgage rates at loanDepot will be approximately $1000. In areas with more expensive housing costs, such as California buyers can expect to save up to $2000 annually.

On the other hand, private mortgage insurance companies are concerned about increased competition from the FHA. As a result, experts estimate that private mortgage insurance companies may lose as much as 15% of business to the new regulations.