This was a bummer. It was way back in August that I posted the last FHA vs Conventional comparison for a buyer with 5% down and a good, but not perfect, FICO score at 700.
I sat down yesterday to run the numbers again. It was November 1. The last post was August 27. We’ve seen the GDP jump. We’ve seen the Fed’s mortgage backed security purchase program begin to wane. We’ve seen housing numbers come in hot and housing supply dwindle.
The numbers were the same. The 30 Year Fixed Conforming was 5%. It was also 5% for the FHA interest rate.
Recap of the last FHA vs Conventional Comparison (see the prior post for the full numbers):
- Monthly Payment: FHA wins. Lower due to the lower monthly mortgage insurance component.
- Total Cost: The FHA is a worse option for about the first 24 months due to the up-front mortgage insurance cost. After that time, it outperforms the Conventional loan.
FHA vs Conforming Over 10 Years
There was one point that was not addressed well in the old post: The same FHA monthly mortgage insurance that is lower on a monthly basis is also permanent. Unlike PMI, it doesn’t go away at 80% loan-to-value (or 78% on a refinance transaction). The FHA “PMI” survives the life of the loan until it is either paid off over many years or paid off at once via a refinance.
A 95% loan reaches 80% loan-to-value just short of ten years. So, we’ve expanded the comparison from five years to ten.
The downside to FHA remains the same. There is a large up-front mortgage insurance cost. FHA is the lesser option for the first two years. The upside to FHA remains the same. The total cost of the mortgage is lower from years 2-10.
The FHA loan is almost $15,000 cheaper over 10 years. That presupposes that there is no decision between now and 2019. A relocation from a job, an empty nest, a growing family, or a winning lottery ticket could all change the financial choices.
Who wins the FHA vs Conventional comparison? The person who selects the loan more appropriately tied to their financial future.
