mortgage

# What to know about FHA loans

Compare these advantages to loans not backed by the FHA:

Loans not backed by the FHA
• Offer a less competitive interest rate.
• Require a larger down payment as a percentage of the purchase price.
• Require a stronger credit history.

FHA-insured loans require mortgage insurance, which is the cost of the government's guarantee to the lender that the loan will be repaid. Mortgage insurance also is required on most conventional loans if the borrower's down payment is less than 20 percent of the purchase price or appraised value of the home. This private mortgage insurance may be more or less expensive than the FHA's mortgage insurance.

The FHA has charged an upfront premium of 1.5 percent of the loan amount, plus an annual premium of 0.5 percent of the loan amount if the loan is for more than 15 years and has a loan-to-value ratio of more than 90 percent. However, the agency has announced plans to introduce a new pricing structure in which higher-risk borrowers will be charged more and lower-risk borrowers will be charged less than average-risk borrowers. Borrowers who have a stronger credit history generally are judged to be a lower risk of default.

The terms "upfront" and "annual" are misnomers, to some degree, because the upfront premium typically is included in the loan amount and the annual premium typically is paid in monthly installments.

This example illustrates how to calculate the cost:

Calculate cost
 Mortgage amount \$100,000 Upfront premium x 1.5% Total: \$1,500 Interest for 25 years (based on loan terms) x 6.5% Total upfront premium per month: \$9.48 Mortgage amount \$100,000 Annual premium x 0.5% Total: \$500 / 12 months Total annual premium per month: \$41.67 Total upfront premium per month: \$9.48 Total annual premium per month: + \$51.67 Subtotal per month: 51.15 Calculations figured using Bankrate's mortgage calculator.

###### What kinds of loans does the FHA insure?
Most FHA-insured loans have a fixed interest rates and payments. However, the FHA also insures certain adjustable-rate mortgages, or ARMs, on which the interest rate and payment may change over the term of the loan. ARMs that are FHA insured usually have an annual adjustment cap of 1 percent or 2 percent and a lifetime adjustment cap of 5 percent or 6 percent. The FHA also insures purchase-and-rehab loans through its 203(k) loan program.

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