What is better for you: The FHA mortgage or the Conforming mortgage?
Choosing between the two most popular mortgages, the FHA and conforming, can be done quite easily. It only takes a few pieces of information; your current credit rating, the amount of funds you have for a down payment, current interest rates and the schedules for mortgage insurance premiums. Armed with this information, it is possible to make a logical choice for a good home loan.
Different Down Payments
One of the major reasons that first time home buyers utilize the FHA loan is the loan down payment offered by the program. FHA only requires a down payment equal to 3.5% to the purchase price of the home. This is regardless of location size or type of structure.
However, the conforming mortgage does not have a set down payment. For a single family property, the down payment is usually 5%. However, a duplex will require a 15% down payment. Furthermore, the buyer must use a fixed rate loan for these down payment amounts.
The difference between 3.5% and 5% may not sound like much. However, on a purchase price of $275,000 the difference is $4,125. In many cases, that could be enough money to pay for the closing costs.
MIP (Mortgage Insurance Premium)
FHA will charge the borrower with two distinctive mortgage insurance. There is the UFMIP, a premium paid up front. Then, there is the monthly MIP paid with the regular loan payments.
The UFMIP is a percentage amount, 1.75%, charged on the total loan amount. The monthly MIP will vary from 1.20% to 1.25% based on down payment amounts.
On the flip side, a conforming mortgage does not charge any type of premium up front. In many cases, the monthly MIP rates are lower than rates charged for an FHA loan.
The MIP charged by FHA is required on any loan that is a fixed loan for 30 years. This premium must be paid until the loan balance dips below 78% of the home’s value. In addition, the borrower must pay the MIP for at least 5 years.
However, conforming mortgage loans do not charge MIP for loans in which the amount borrowed is less than 80% of the property’s value. If the customer does borrow more than 80%, the MIP will be dropped once the mortgage balance drops below the 80% threshold.
Picking a FHA mortgage or Conforming Mortgage: The Cliff Notes version
Some of these numbers may get confusing for the average home buyer. After all, owning a car does not make one a mechanic. By the same token, buying a house does not make one a mortgage expert. Here are some quick facts that can help most people choose the right loan for their situation.
* Down payment less than 5% – Ask your lender for an FHA mortgage
* Down payment between 5% and 20% – Consult with your lender for the best recommendation
* Down payment of 20% and higher – Ask your lender for a conforming mortgage.
Keep in mind that the mortgage rates for both products fluctuate. There are some days where the FHA rates are lower than the conforming rates. There are more days in which the conforming mortgage rates are the lowest. This is why it is so crucial to deal with a reputable lender that has access to both kinds of loans and can get you the best deal.
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