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(Reuters) - The U.S. Federal Housing Administration will reduce the annual premiums on mortgage insurance on home loans the agency insures by a quarter point on Jan. 27, it said on Monday.
The FHA projected homeowners it insures would save an average of $500 a year with the new premiums.
The lower premiums will come after mortgage rates recently hit their highest levels in over two years and the FHA's Mutual Mortgage Insurance Fund has been recovering from the hit it took due to claims in the aftermath of the housing bust.
"After four straight years of growth and with sufficient reserves on hand to meet future claims, it’s time for FHA to pass along some modest savings to working families," Housing and Urban Development Secretary Julián Castro said in a statement.
The agency, which is part of the Department of Housing and Urban Development, offers mortgage insurance, often to first-time home buyers and those with low income or below top-notch credit. The insurance protects lenders in case of defaults.
The premium reduction was projected to lower the cost of housing for about 1 million households that are expected to purchase a home or refinance their mortgages using FHA-insured financing in the coming year, according to HUD.
The planned cuts will lower FHA insurance premiums to 55 basis points from 80 basis points on mortgages with loan-to-value ratios of or below 95. Premiums on riskier mortgages will drop to 60 basis points from 85 basis points.
The move places FHA mortgage insurance premiums "basically back to the pre-crisis levels" of 50 to 55 basis points, the statutory floor, JPMorgan analysts wrote in a research note.
After the housing crisis, the FHA raised its insurance premiums numerous times to replenish the Mutual Mortgage Insurance Fund.
Reporting by Richard Leong; Editing by Lisa Von Ahn