Frequently Asked Question: Which is Better: An FHA Mortgage with 5% Down, or a Conventional Loan with 10% Down?
Q: Which is a better way to buy a home? Getting an FHA mortgage with 5% down payment and with 5% emergency backup? Or a Conventional loan with 10% down and no emergency backup?
A: Let's use an example. Let's say you want to buy a house for $100,000. For a conventional mortgage, you will put $10,000 down. For an FHA mortgage, you will put $5,000 down. So, we will compare a conventional $90,000 mortgage with a $95,000 FHA mortgage.
With FHA, you will have an Upfront Mortgage Insurance Premium (UFMIP) of 1.75% of the loan amount, but that can be rolled into the loan. So, your FHA loan will be $96,662. Both loans will have a monthly mortgage insurance premium.
Let's also assume the interest rate is the same for both mortgages at 5.0%. When you include principal and interest and monthly mortgage insurance premiums, you will pay about $34 more per month with an FHA loan as compared to the conventional loan. But, you will hold $5000 in cash reserves. Assuming that you will not earn any interest on the $5000, it will take 142 months (12 years!) to draw $34/mo off the $5000 in reserves to break even.
Additionally, with a conventional mortgage, you will need two months of PITI mortgage payments in reserves after settlement. PITI includes Principal and Interest, escrows for Taxes and Insurance, and mortgage insurance premiums. With FHA, you don't need any cash reserves. However, you will show $5000 in reserves. You will actually have an easier time getting approval for an FHA mortgage than for a conventional one. Additionally, you will have funds available for any small emergencies that may arise.
In this case, you will be better off with the FHA loan with 5% down than with a conventional loan with 10% down.
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