Looking for a low rate? Try FHA
August 14th, 2013
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Home buyers and homeowners interested in refinancing have been keeping watch over mortgage rates in recent weeks, waiting for the right window to lock in the lowest available rates. Government-insured FHA rates are typically lower than the mortgage rates on conventional home loans, so some borrowers may want to compare payments and fees on both types of home loans.
According to HSH.com, interest rates on 30-year fixed-rate loans averaged 4.01 percent for conventional conforming loans during the week ending May 31, 2013. FHA 30-year fixed-rate loans averaged 3.64 percent during that same week. On a $300,000 loan, the FHA loan would have a lower principal and interest payment of $63 per month, which comes to $756 per year and $22,680 over the life of the loan.
The difference between conventional and FHA loan rates varies along with fluctuating mortgage rates and borrowers also need to consider the additional costs associated with both loans. All FHA lenders are required to charge both an up-front and annual mortgage insurance premium regardless of the size of a borrower’s down payment or home equity. Conventional lenders only charge private mortgage insurance on borrowers who have less than 20 percent home equity or are making a down payment of less than 20 percent of the purchase price.
Factors impacting mortgage rates
The actual mortgage rate on a loan approval varies from one borrower to another and is influenced by a variety of factors, particularly for conventional loans, such as:
- Credit score - Conventional mortgage rates are incrementally higher for borrowers with a credit score below 740, so borrowers with a lower credit score may be better off with an FHA loan. FHA rates don’t adjust according to borrower’s credit scores.
- Loan-to-value - Conventional loans often carry higher interest rates if the loan-to-value is less than 20 percent; FHA loans have the same interest rates regardless of the amount of home equity or down payment.
- Points – Mortgage rates are often quoted with discount points, so be certain to compare loans with either zero discount points or the same number of points.
When deciding between FHA mortgage loans and conventional loans, borrowers should compare mortgage rates, lender fees and mortgage insurance before choosing a loan.
Michele Lerner, author of “HOMEBUYING: Tough Times, First Time, Any Time”, has been writing about personal finance and real estate for more than two decades for a variety of publications and websites including The Washington Post, The Motley Fool, Investopedia, Insurance.com, HSH.com, SavingsAccount.com, National Real Estate Investor magazine, The Washington Times, Urban Land magazine, NAREIT’s REIT magazine and numerous Realtor associations.
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