Fha V. Conventional Mortgage Comparison

FHA Interest Rate Analysis: A look at the FHA vs. Conventional Comparisons There have been a number of changes that have overlapped to alter the FHA vs. Conventional loan comparisons. The FHA loan requirements are certainly more flexible than the guidelines of their conventional counterparts, but that isn’t what is changing the nature of the loan comparisons any more. There are three major elements that have changed the math behind these comparisons. 1. FHA Interest Rate parity: FHA loan rates had lagged behind conventional rates for years. Typically, the FHA mortgage rate was higher and that would make the conventional or conforming loan more attractive. 2. FHA and PMI: The private mortgage insurance companies have significantly increased their rates in general. They have also added risk-based pricing, meaning that a lower credit score gets a higher rate. For example, assuming 5% down on a 700 FICO, the PMI factor is .94%. At 699 FICO, that jumps to 1.20%. FHA is just .5%; although there is an up-front component we’ll discuss. 3. Loan Level Price Adjustments: This is the second layer of credit-driven costs of getting a conventional loan. Fannie Mae and Freddie Mac have additional layers of expense that are triggered for buyers with less than stellar credit. For example, at that same 5% down, the 699 FICO score has an additional expense of 1.188% discount points. Here is a quick look at the payments related to our FHA vs. Conventional comparison:

Interest Rate MI Factor

FHA 740 FICO 720 FICO 700 FICO 680 FICO $285,000 $285,000 $285,000 $285,000 $285,000 $4,988 $289,988 $285,000 $285,000 $285,000 $285,000 0.000% 0.000% 0.750% 1.188% $ $ $ $ 2,137.50 3,385.80 4.875% 4.750% 4.750% 4.750% 4.750% 0.500% 0.940% 0.940% 0.940% 1.200%

Principal & Interest Monthly MI Total Monthly Payment

$1,534.64 $1,486.69 $1,486.69 $1,486.69 $120.83 $223.25 $223.25 $223.25 $1,655.47 $1,709.94 $1,709.94 $1,709.94

Base Loan Amount FHA UFMIP (financed) Loan Amount LLPA Factor LLPA Cost

$1,486.69 $285.00 $1,771.69

The total cost of a mortgage is equivalent to any additional up-front expenses plus the nonprincipal costs paid on a monthly basis. Essentially, the cumulative interest and the cumulative mortgage insurance are the expenses related to the mortgage. The rest of the mortgage payment is principal.

When we look at these costs over a multi-year period, the up-front mortgage insurance payment from FHA is amortized. What we see if fairly dramatic:

Net Savings By Year, 5 Year Comparison $8,000 740 FICO, $7,091 720

$7,000

Axis Title

$6,000 FHA, $5,313 700 FICO, $4,953

$5,000 $4,000 $3,000 $2,000 $1,000 $-

680 FICO, $Years

In the beginning, regardless of credit score, the FHA loan option is the most expensive at the time of closing. However, over the course of the first year, the FHA option for a 680 FICO score is better than conventional. Sometime in year 4, the FHA option begins to outpace the Conventional options. For most borrowers at 720+ FICO, the Conventional option remains best for their needs.

To see current comparisons, stop by FHA Interest Rates.