FHA Loans Becoming More Expensive than Conventional Mortgages

First-time home buyers traditionally look at FHA loans as the more affordable alternative to conventional mortgage loans. The home loans backed by the Federal Housing Administration are much more easily accessible than their counterparts, but this does not make them less expensive. In fact, they will result in much higher installments than buyers expect.

At present, the rate on a 30-year fixed FHA loan offered by the largest mortgage lender in the US is 4.125%. At the same time, the average rate on a 30-year fixed conventional mortgage loan from this lender is 4.375%. The difference of 0.25% is fairly small, but significant. In any case, it is in favor of the loans backed by the government. The interest rate is lower indeed but unfortunately it does not result in lower monthly installments or lower total cost.

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One of the main factors for the higher monthly installments and higher total cost of the FHA loans is the minimum down payment of 3.5%. For the conventional loans, it is 20%. With an FHA loan, the principal amount will be higher and this will result in larger interest payments on a monthly basis. This makes the monthly installment on an FHA loan with 3.5% down payment some 17% higher than the installment on a conventional mortgage with down payment of 20% given the current rates.

The major factor which makes the FHA loans more expensive, however, is the insurance payment. It consists of two chunks. The first one is the upfront payment which is 1.75% of the value of the loan. As the down payment is quite small, the insurance payment is considerable. Additionally, you will have to pay an annual premium of 1.35% of the outstanding loan amount. When this premium rate is calculated into the monthly installments, they become 44% higher than those on conventional loans.

Overall, the FHA loans are much costlier than the conventional mortgage loans at present and this can make them much less affordable to many first-time home buyers.



Christian Calvin mortgage Christian is a contributing writer for Mortgage.info. He is a graduate from the University of Tennessee with a degree in Communications and a concentration in Broadcasting. Christian has served as vice-president for a privately-held company for more than 20 years. Additionally, he has also applied his writing and business knowledge to various websites with a focus on business and sports news . . . both of which are passions. Christian enjoys playing golf and spending time with his family and friends.

Contact: christian@mortgage.info

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