For the last few decades most borrowers, lenders, and real estate professionals have regarded the FHA Loan as the least expensive loan option for purchasing a home. The low 3.5% down payment and low mortgage insurance rates made buying a home more affordable for borrowers.
Now there has been a sea change in the mortgage world and FHA is fast becoming one of the more expensive options. The FHA loan is still the best you can do if you have less than stellar credit. And now with so many options to repair and enhance your credit score it makes sense to do this before applying for a mortgage so that you can get the best options.
If you don’t know how get the credit score you need, read my last blog post Bad Credit to Great Credit in Three Easy Steps and Why you need it Now? http://wp.me/pWK6G-99
What happened to our Beloved FHA? Congress, that’s what happened!
Currently under the current FHA guidelines a borrower purchasing a 30 year mortgage will pay 1.75% in an upfront PMI payment and 1.75% per year in PMI payments for the life of the loan. It used to be that once you had 22% equity in the property your mortgage insurance would go away but in 2013 Congress made PMI insurance permanent. You pay until the loan is paid off. Most borrowers get a FHA loan thinking they are going to pay PMI insurance for only five years but the truth will cost those borrowers tens of thousands more in PMI insurance over the life of the loan. See the example below:
Example: $250,000 purchase – FHA loan
3.5% down payment –$ 8750.00
Upfront PMI – $ 4221.88
Loan amount –$ 245,461.88 assuming sellers pays all of closing cost
Monthly PMI – $265.92
Monthly payment excluding taxes and insurance at 4% – $1437.79
Mortgage insurance paid over the life of the loan $126,655.20, many borrowers took FHA loans thinking they would only pay for 5 years ($21,109.20) but congress changed the rules.
FHA is only good if there is no other affordable option; and luckily there is a better way to go.
Now there is a conventional loan product with the mortgage insurance paid upfront and included in the interest rate offered. This product eliminates so much of the cost of purchasing because there is no upfront PMI or monthly PMI. A conventional loan with Lender Paid Mortgage insurance or LPMI is the way to go. Most borrowers know of this option because it is rarely offered.
3% down payment –$7,500.00
Up front PMI – 0.00
Monthly PMI -0.00
Loan amount – $242,500.00 assuming seller pays all the closing cost
Monthly Mortgage payment excluding taxes and insurance assuming 4.25% – $1192.95
As you can see the savings between the FHA and the LPMI are $330.74 per month or $119,066.40 over the life of the loan. This is why educated borrowers are making a move away from the FHA program and looking to LPMI as a better way to finance property. Not only is the capital needed up front less but the lifetime cost is less. In addition, the higher interest rate gives a larger tax deduction at the same time.
Current FHA loan holders can use this program in get out of current FHA loans and PMI insurance provided they meet the guidelines. People are saving tens of thousands walking away from FHA.
Give me a call at 410-908-5987 if I can be of service to you and your family.
Wishing you Wealth Wellness and Wisdom
Manager of Wealth