We’re going to look at another comparison.  We’ll focus on a 700 FICO score, 5% down payment, [...]]]> 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

Today’s example uses a $300,000 home at 5% down.  The FHA mortgage rate [...]]]> The FHA Loan Rates continue to trade within just a narrow margin relative to conforming.  With credit scores driving the conventional mortgage rate and the associated PMI, here’s a comparison of how the FHA vs. Conventional dynamic changes based on credit score.

Today’s example uses a $300,000 home at 5% down.  The FHA mortgage rate won’t change, nor will the monthly mortgage insurance.   Here’s a look at the data:

This isn’t abnormal.  The FHA vs. Conventional comparison will typically yield a lower payment on the FHA loan.

The costs related to the loan over time are the incremental costs (either UFMIP or LLPA adjustment) plus any monthly mortgage insurance plus cumulative interest paid.  Principal is not included under these calculations nor are any costs that do not vary based on loan selection.

When we look at the total savings for FHA vs. Conventional using both FICO scores, the loan options begin to separate.  At the time of closing, both conforming loan options are significantly less expensive than the FHA Up-Front Mortgage Insurance Premium.

In the beginning of Year 2, the FHA vs. Conventional winner for a 680 FICO score is the FHA mortgage.

For the period between years 2 and 5, for the 700 FICO, the conventional loan will outperform.

Should the FHA continue the moratorium on the risk-based up-front mortgage insurance premiums, it appears that the 700 FICO range is a tipping point for which loan, FHA or conventional, is better.

I sat down yesterday to run the numbers again. It was November 1. The last post was August 27. [...]]]> 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.