It seems like a very simple question but the answer can be quite complicated. The wrong choice could cost you thousands of dollars over the years.
Many people shopping for a mortgage will jump to the conclusion that the loan with the lower interest rate would be the better deal. Well "not always" is the answer. FHA loans can carry some of the lowest rates available because they also carry with them some if the highest “mortgage insurance” rates which could cost the borrower more money in the long run.
Borrowers that cannot qualify for conventional financing do not have a lot of choices and may only qualify for FHA financing. If the borrowers can qualify for both conventional and FHA they have to look hard at the numbers in order to determine which loan option will save them money over the period of time they plan on staying in the home?
A couple of years ago Fannie Mae and Freddie Mac said that they would now begin allowing 5% to 3% down payment mortgages for first time home borrowers. Restrictions apply such as, mortgage insurance, 620 FICO and counseling but the loans are out there and available.
While qualifying for an FHA loan may be less restrictive than Conventional loans they can be harder on properties that can qualify. FHA loans may not be used to purchase an investment property, unless it is a four unit property and one of the units will be occupied by the borrower. To see whether a particular transaction qualifies for FHA and or Conventional financing go to Qualifying.
The cost of a mortgage should be determined over the life of the loan and not by interest rate alone. It is always possible that one loan may be more cost effective over another over different periods of time. Since that length of time that you will have the loan cannot always be predetermined, it is best to look at three different points in the life of the loan: 5yrs, 10yrs, and 15 yrs. This will give you a pretty good idea of which loan will save you the most money over these periods of time. Your loan officer will be able to assist you with these numbers, just ask.
In order to calculate the total costs, you will need to consider all the things that add to the cost of a mortgage loan; lender charges, mortgage insurance charges, title fees, principle payments, interest payments, points, upfront fees, and any other loan related fee. Calculate the sum of all these over the periods of 5, 10 and 15 years. Do this for both Conventional and FHA and you will soon see which is a better deal for you personally.
In general on loans between $200,000 and $417,000 an FHA loan will have higher costs than a Conventional loan. So, Buyers would conclude that for loans in this amount they would be better off with Conventional financing if they qualify. Above this amount the findings are mixed and will depend on additional factors, such as: credit score and loan to value ratios. Credit scores above 740 and LTV’s less than 90% would have lower fees for example than a borrower with a 700 FICO and an LTV of 95%.
This is where a good loan officer comes in handy to assist you with the findings and help you through the process. Call me for a referral to a reputable Loan Officer.
If you have all the information, then it is easier to make the right decision for you. For information on homes for sale check out my website at PlacervilleRealEstate.com.
Thanks for listening, John Conca