Are you looking to buy a new home? Sometimes taking a higher interest rate is better. What did I just say?!?! Yes, let me repeat, sometimes taking a higher interest rate is better. Let me explain.
The two most popular loan programs are conventional and FHA loans. Both have pros and cons, I am not going to get into a lot of detail on that right now. What I want to explain is the cost difference due to PMI, private mortgage insurance. FHA recently increased the amount of month mortgage insurance (MI) required on all of its loans. Not only did the monthly fee go up but now those fees will never go away. Conventional loans on the other hand have PMI that falls off eventually and it is less expensive per month.
Let's take a look at a real life example. This example is based on someone with a 740 or higher credit score. If your scores are lower than that I would highly recommend talking with someone familiar with a process called rapid rescoring to get your scores as high as possible prior to getting a mortgage. Here are some numbers, I will explain them below.
Purchase price: $200,000
FHA
Down Payment: $7000
Rate: 4.25%
Monthly PMI: $215 for life
Monthly P&I (with PMI) :$1181*
APR: 5.741
Conventional
Down Payment: $10,000
Rate: 4.875%
Monthly PMI: $106 - for 115 payments
Monthly P&I (with PMI) :$1111*
APR: 5.33
As you can see, FHA has a lower interest rate and less money required at closing but the total payment and monthly MI are higher. The MI on the FHA loan is for life but the conventional will drop off at 115 payments assuming you never make any extra payments. For the first 9.5 years you would save $840 a year after which, the payment will drop to $1005 saving you $176 a month. If you were to keep the loan for the full 30 years you would save $48,170 net! If you study the numbers you will see that you get that $3000 extra down payment back in savings in only 42 months, then, as they say, the rest is gravy!
Ryan Salo (NMLS#147309) is a Loan Officer with ENG Lending, a division of Bank of England Arkansas. He been in the industry for almost 10 years and has guided and taught hundreds of homeowners in finding the right fitting loan and maximizing their credit scores. He lives in Lakewood with his wife and 4 children. He can be reached at 440-399-1066.
*rates and fees are subject to change at any time. Payment does not include taxes and insurance. Actual payment obligation will be higher. Informational purposes only. The views and opinions expressed herein are those of Ryan Salo and are not endorsed by Bank of England. Not an offer to lend or extend credit. Credit subject to approval, including credit worthiness, insurability and ability to provide acceptable collateral. ENG Lending, a division of Bank of England Arkansas, NMLS 418481,30400 Detroit Rd Suite 214 Westlake Ohio 44145 www.ryansalo.com
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