mortgage

Save by comparing FHA to PMI

On the surface, FHA loans may seem to offer interest rates slightly lower than conventional loans, but they can end up being more expensive. That's because of mortgage insurance costs, which are included in the borrower's monthly mortgage payments. Mortgages loans with less than 20 percent down generally have to carry mortgage insurance, but the insurance on FHA loans is more expensive than the insurance on conventional loans. In addition, FHA borrowers are charged an upfront fee of 1 percent of the total loan that often is added to the total amount borrowed.

For instance, in the example outlined in the chart below, a borrower makes a 10 percent down payment on a $198,000, 30-year fixed mortgage. In early May, the interest rate would be about 4.5 percent with an FHA loan compared to 4.875 percent with a conventional loan. Because of the higher mortgage insurance costs for FHA loans, the monthly payment would actually be $47 less with the conventional mortgage, Hackett says. In this example, the FHA loan has a $1,980 upfront mortgage insurance premium added to the total loan amount.

Comparing loans: FHA vs. PMI
FHA-insured
loan
Conventional loan
with PMI
House price$220,000$220,000
Loan amount*$199,980$198,000
Interest rate4.54.875
Monthly principal & interest$1,013$1,048
Monthly mortgage insurance$182$102
Monthly principal, interest, mortgage insurance$1,195$1,150
* FHA loan has 1 percent upfront premium added to loan amount.

"The comparison has to include everything," Moskowitz says. "And if your broker or your lender doesn't want to do a comparison you shouldn't deal with them."

Avoid getting steered into an FHA

Some brokers or lenders may try to steer you into an FHA loan for various reasons.

Up until recently, some brokers may have pushed borrowers into FHA loans because they made more money on them, Moskowitz says. New regulation that governs how brokers get paid went into effect in April and will help prevent the problem, he says.

"They made 30 (percent) to 40 percent more on an FHA," he says. "So there was a concern that people were steering borrowers into FHA loans because they were making more on them but in many cases, FHA was the wrong way to go for the borrower. But that shouldn't be happening anymore, at least not based on commission."

Some brokers, however, may try to persuade a borrower to opt for an FHA loan simply out of "laziness" or "ignorance," Moskowitz says.

"If you go to an FHA shop and that's all they do, most likely that's what they'll offer you because that's what they know."

Since the crash of the housing market after subprime loans evaporated, an increasing number of lenders have obtained approval to offer FHA loans. FHA's market share has increased from about 5 percent before the crisis in 2006 to about 30 percent.

"Everyone is doing FHA these days," Moskowitz says. "But that doesn't mean they are for everyone."

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