FHA vs Conventional – Up-front Costs

Both the 30 Year Fixed Conventional and FHA loan rates dropped even lower this week.  These rates are now pressing against some of the best rates of all time, set almost exactly one year ago.

FHA vs. Conventional

We’re going to look at another comparison.  We’ll focus on a 700 FICO score, 5% down payment, and we’re assuming a single-family residence.  We’ve used a price of $300,000 for both examples.

Monthly Payment

In terms of monthly payment, the FHA mortgage nearly always is cheaper for the 700 FICO score borrower.

This is largely because the PMI is .94%.  That should be read and referred to as a percentage.  Since the FHA PMI is only .5% in this scenario, the conventional loan’s effective rate is roughly .3% higher.  The Conventional PMI is .44% higher and the interest rate is .125% lower.   Jump to the end of the article for the full data.

Total Cost Over Time

When we look at the total costs over time, FHA starts out worse.  It has the up-front mortgage insurance premium whereas the conventional loan has the smaller loan-level price adjustment.  Net: Conventional better at day 1.

Somewhere between year 4-5, the FHA loan begins to outperform the Conventional loan.

FHA vs. Conventional – Cash to Close

We again see a significant difference between these two loan.

FHA has a much larger up-front mortgage insurance premium, but it is financed into the loan.  The Fannie Mae or Freddie Mac loan will have a loan-level price adjustment.  This is a fee.  The conventional loan must pay this up-front or accept a higher mortgage rate.

Presuming it is paid as a fee to secure these low rates, then the conventional loan has a one-time, .75% fee, or $2,138.  That is how much more money the conforming loan needs to bring to the table.

Monthly Mortgage Payment Calculations