Searching for a home financing? If yes, consider the most common types of mortgage loans available today. The two most common types of mortgage loans are government loans and conventional loans. When we say government loans, we are referencing FHA Mortgages and USDA Mortgages. VA Mortgages also fit under this category although VA financing is not so common in Sonoma County anymore. For our purposes we’ll be looking at FHA Loans versus conventional loans and the disparity in interest rate between the two programs.
When most people think of of mortgages, they divert to a 30 year fixed rate mortgage. The standard 30 year fixed rate conventional loan is a benchmark mortgage every home buyer and homeowner aspires to obtain. Unfortunately, depending on variances such as credit score, property type, loan-to-value, and monthly revolving debt, the conventional mortgage loan might not always fit the unique borrower scenario. Moreover, interest rates on FHA Mortgages are priced significantly better than conventional financing.
Why the disparity between FHA Mortgage Rates and Conventional Mortgage Rates?
Let’s take a closer look. The conventional mortgage loan is the most in demand mortgage available. As a result, because of the demand of this product, mortgage lenders are very thinly capitalized on this product type. Put another way, conventional mortgage rates are not as as competitive as FHA mortgage rates, because there is less capital built into a conventional loan as an FHA loan. The reason is because there is no backing on conventional as there are on FHA insured mortgages. No one insurers conventional loans other than the lender creating and originating that loan to be sold in the secondary market. The originating lender takes all of the risk on that loan.
FHA Mortgages Rates are presently .375 to .5% better in price than conventional mortgage rates. Here’s why: FHA Mortgages are insured by the Federal Housing Administration with HUD oversight. The Federal Housing Administration ensures the lender and the investor against default risk. If that FHA loan goes bad, the FHA ensures the lender thereby protecting them allowing them to originate the FHA loan with less risk. In other words, FHA loans don’t have that additional risk because of the FHA insurance that the borrower pays up front and on a monthly basis over the life of the loan.
While FHA Mortgage Rates are more competitive than Conventional Mortgage Rates, they cost more in the end, despite the lower rate of interest.
Despite the fact that you can secure a better interest rate on an FHA insured mortgage, it’s still a costlier mortgage at the end of the day. Here’s why: FHA Mortgages permit expanded credit qualifying. This presents a potential credit risk. It doesn’t matter the characteristics of the transaction per se, the FHA charges two forms of mortgage insurance.
Following are those FHA premiums:
UFMIP 1.75% of the base loan amount
For example a home loan in the amount of $300,000 using FHA financing will produce a financed loan in the amount of $305,250. The $5250 difference is the upfront mortgage insurance premium which is paid to the FHA for the benefit of using that type of financing.
MIP 1.25% of the base loan amount monthly
For example home loan in the amount of $300,000 will compute a monthly mortgage insurance premium of $312.50 per month on top of the property taxes, hazard insurance and principal and interest payment. This additional $312.50 per month can influence qualifying ability and/or purchasing power on home financing.
So should you be looking at FHA mortgage rates or conventional mortgage rates?
This depends on how you can qualify for the mortgage loan. There really is no right way to answer this question because of the fact that every borrower credit package is different. We’ve had scenarios before where people could qualify for FHA financing and then they determine they going with conventional financing will cost them last and as a result they move forward with a conventional loan. By the same token, there’s another borrowers of ours who decided an FHA route is a better choice due to down payment capability.
If you think you’re going to be needing a mortgage loan, start by getting a complementary mortgage rate quote. Get a feel for the difference between your conventional mortgage rate in your FHA mortgage rate on your purchase or refinance transaction. Then decide what you think is the best choice for you over time. Begin researching FHA Mortgages Rates Vs. Conventional Mortgage Rates.