Why should we buy with an FHA loan?
Question of the week: Why should we buy with an FHA loan?
Answer: Because it’s cheaper.
But there’s mortgage insurance?
Let’s compare apples to apples, or in this case highly leveraged purchase with highly leveraged purchase. Long time readers of the WR&MU know I like leveraging into purchases with as little down payment as possible; read “Why mortgage insurance is a good thing” from WR&MU last August for more detail.
Many buyers in California have sufficient income to qualify for a new home purchase, but lack a large amount of funds for down payment and closing. Hence, many are understanding putting less than 20% down and having mortgage insurance as part of their monthly payment.
People have negative view point of FHA because the mortgage insurance (MI) for FHA loans is more onerous than mortgage insurance on conventional mortgages. As well, for conventional mortgages the MI can be removed after a period of time and reduced loan-to-value. The monthly mortgage insurance on FHA mortgages stays on the loan for the life of the loan.
In prior markets when there was a small spread between conventional rates and FHA rates, the ability to purchase with 5% down for conventional mortgages clearly gave conventional mortgages the advantage, because of the cheaper, and ability to eliminate, MI.
For the past year or more, FHA rates have been considerably lower than conforming rates, not only reducing the conforming loan advantage, but eliminating it. This is especially true for high-balance purchases.
Consider Alain and Rene. They are looking to purchase their first home. They have excellent income, little debt, but only about $60,000 available for their home purchase. Their debt-to-income ratio qualifies them for a home up to the maximum high-balance loan limits in LA and Orange Counties ($1,089,300). They found a home on the market for $1,100,000.
We run the numbers and compare purchasing with FHA versus Fannie Mae.
As you can see, the only advantage Fannie Mae has is the lower monthly mortgage insurance payment.
On a monthly basis the FHA mortgage is over $400 per month lower.
At closing the FHA loan requires $16,500 less cash for down payment.
But what about the upfront mortgage insurance FHA requires?
The upfront MI for FHA is expensive, 1.75% of the loan amount, or in this case $18,576. This amount is added to the loan, and is included in the FHA mortgage payment in the above chart.
But what about being able to eliminate the conventional MI but not the FHA?
To eliminate the conventional MI the borrower must make 24-consecutive payments on time (i.e. within the month due, if paid after the 15th of the month but before the 1st of the next month the payment is considered on time), and be able to obtain an appraisal via the lender’s approved appraisal management company showing the loan-to-value of the outstanding loan balance to current value is 78% or less.
This is an advantage, and if this happens two years after the purchase the savings per month flips from FHA having a $407 per month advantage to the conventional loan having a $3 per month advantage.
Consider that during that 2-year period the FHA buyer has saved $21,384 more money than the conventional buyer. If after the time the conventional buyer eliminates their MI and neither buyer makes any changes to their loans—they retain the same interest rates and payments, and the FHA buyer continues paying mortgage insurance, for the remaining 28-years of their mortgages the conventional buyer will have saved $1008 in monthly payments more than the FHA buyer paid.
If it takes the conventional mortgage buyer longer than 2-years to reach the required 78% loan-to-value, the total savings on the monthly payments will decline accordingly ($36 per year).
To summarize, two buyers, one with an FHA mortgage with minimum down payment, the other with a conventional mortgage with minimum down payment, with the conventional buyer eliminating their mortgage insurance as soon as eligible, after 30-years when the final mortgage payments are made, the FHA buyer will have saved $20,376 more than the conventional buyer.
But…mortgage insurance…is less important than saving cash at closing.
If you, or anyone you know, wants to run numbers and options for your home purchase, or debt consolidation refinance (FHA has cashout refinance options), please contact me.
To schedule an initial meeting by phone or Zoom, click here for my calendar, please feel free to forward to a friend or family member!
Have a question? Ask me!
Meh, was pretty much the reaction of markets to yesterday’s Consumer Price Index data. Prices rose 0.2% in July, matching June’s price increase. Year over year, the report showed, CPI increased for the first time in 13-months, increasing from 3.0% in June to 3.2% in July. Driving CPI is housing, being given a 90% influence factor for the increase in prices; rents were up 0.4% and 8% from last July. Putting downward pressure on CPI were declines in prices for airline tickets, used cars and medical care. Overall the numbers add some credence to the Fed not making any change in its benchmark rate when it Open Market Committee meets in September.
Rates for Friday August 11, 2023 “Mystery” sell off was the term one of the mortgage market sites we subscribed to describe yesterday’s big sell off in mortgage-backed securities (sell off means lower prices and higher rates). The result is an increase of the conforming rate above 7.00%. I have weekly rate charts used for the WR&MU going back to 2005, this Friday’s rate is the highest for conforming mortgages on any of those charts.
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:
30-year conforming 7.125% Up 0.125%
30-year high-balance conforming 7.500% Flat
Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.
I presume many of the WR&MU readers have spent some time in Maui, likely enjoying strolling Front Street in Lahaina enjoying the shops, eating some lunch, having a beverage, getting some shaved ice. The videos showing the complete devastation of the town are shocking, the speed with which the fires spread was mind-numbing.
As always when there are disasters, of any size or any cause, the Red Cross is there to help those in need. Here is a link to the Red Cross disaster relief page where you can make a donation to assist not only those on the island of Maui, but around the country impacted by disasters.
Have a great week,
Dennis
Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog
