Is an FHA loan or a conventional loan with PMI a better option?
Among the many decisions you'll have to make on your journey to homeownership will be the choice of how much to pay upfront, also known as the down payment.
The traditional amount to put toward your down payment is 20% of the home's value. But, as many prospective homebuyers know, this isn't always feasible. Many lenders will accept lower down payments, while requiring the buyer to also purchase Private Mortgage Insurance.
Another way to put less than 20% down is to look into other loan products, like an FHA loan. These are government-sponsored products that allow down payments of as low as 3.5%.
For the buyer who wants to put less than 20% of the price of the home down, both PMI and an FHA loan are good options. But for some, one might be more beneficial than the other. Before making this decision, it's important to know which is the more financially responsible choice.
History of FHA loans and PMI
The Federal Housing Administration was first created in 1934. At that time, the housing industry was struggling immensely, according to the U.S. Department of Housing and Urban Development. The FHA helped many Americans become homeowners, and largely improved the market as a whole.
Years later, in the late 2000s, another housing downturn came in the form of the Great Recession.
"Between 2007 and 2009, FHA loan originations increased 355%."
During this time, many homebuyers didn't qualify for PMI, so people who wanted to buy a home with less than a 20% down payment needed to find another option. This caused FHA loan popularity to soar. Between 2007 and 2009, FHA loan originations increased 355%, according to WalletHub. In 2009, a record 1.8 million FHA loans were issued, compared to the 402,000 just two years prior.
Meanwhile, conventional loans with PMI plummeted. In 2007, 1.5 million conventional loans with PMI were originated. By 2010, that number dropped to 260,000.
In the years that followed, FHA loans began to increase in price. Additionally, as the housing market continued to recover, PMI became affordable again. This gave rise to conventional loans with PMI once more.
In 2015, FHA loans were still more popular than those with PMI attached. However, FHA loans are trending downward overall, while PMI is gradually growing more popular. And while they both have their merits, it's important for homeowners to understand why one might be a better option than the other.
When does PMI make sense?
If you can pay 22% of the home's value quickly or plan on staying in the home for a long time.
WalletHub pointed out that the economic value of an FHA loan depends on several factors, including how long you plan to live in the home and what your credit score is. FHA options include mortgage insurance, but it's wrapped up in the price of the loan as a whole. PMI, on the other hand, is a completely separate product from the loan itself. PMI can be taken off after a few years, once the loan amount reaches 78% of the home's value. In the case of an FHA loan, however, the mortgage insurance will be included for the entire life of the loan.
If you have good credit.
There is no set amount that a lender can charge for PMI, but it's usually between 0.5% and 1% of the cost of the loan per year. One factor that contributes to how much it will cost is your credit score.
"The cost of PMI dropped 47% for people who had a credit score of 760 or more."
Generally speaking, the higher your score, the lower your PMI will be. WalletHub noted that between 2014 and 2016, the cost of PMI dropped 47% for people who had a credit score of 760 or more. But for people who had a credit score of 660 or lower, the cost increased 28%. For people with a good credit score, choosing PMI over an FHA loan could save them as much as $8,000.
When does an FHA loan make sense?
If you plan on refinancing soon.
PMI makes sense if you plan on staying in the home long enough to pay down 22% of the home's value, at which point you can get rid of the insurance and just pay off the loan. Likewise, if you don't plan on staying in the home for long, an FHA loan might be the way to go, since it's generally a bit less expensive right off the bat.
Additionally, Zillow pointed out that FHA loans are typically easier and cheaper to refinance than conventional mortgages through a process called "streamline refinance."
They also are assumable loans, which means they can be transferred to another party. This means that when it's time to sell a home, the buyer can take on the responsibility of the loan at the same time that he or she purchases the house. Since FHA loans typically have lower interest rates, this might end up be a good selling point.
If you have low credit.
If your credit score is 660 or lower, opting for an FHA loan instead of a conventional loan with PMI can save you as much as $11,000.
If you recently experienced a credit problem.
FHA loans also have looser restrictions for time elapsed between certain problems you might have encountered, like a bankruptcy or foreclosure. If you are pursuing a conventional loan, you'd have to wait four years after a bankruptcy or seven years after a foreclosure to qualify. But if you're looking for an FHA loan, you can qualify just two or three years, respectively, after the event.
Academy Mortgage is one of the top independent purchase lenders in the country as ranked in the 2015 CoreLogic Marketrac Report. Visit www.academymortgage.com to find a loan, get a rate, or calculate your payment today.
Do you know your mortgage interest rate?
There are a few numbers everyone should know to help them understand their own financial health, such as their income and how much they have in savings. One important piece of information for homeowners is their mortgage rate.
However, a Bankrate survey found that more than one-third of people aren't aware of this number.
"Your mortgage rate is one of the most important numbers in your financial life, and there's a good chance that one of your neighbors has no idea regarding how much he or she is paying," Holden Lewis, a senior mortgage analyst at Bankrate.com, explained.
"In some cases, refinancing can earn you a lower interest rate."
Though your rate is a crucial piece of information, many mortgage lenders aren't shocked by the results of the survey, according to CNBC. Buying a home is an emotional purchase, and after looking at homes, speaking to lenders, real estate agents and the many other people involved with the homebuying process, many consumers are just focused on getting everything squared away so they can move in.
Your mortgage rate determines how expensive your home loan is. It's important to know what the rate is so that you can make smart decisions about whether to refinance. In some cases, getting a second mortgage can earn you a lower interest rate, which would save you money over time.
"The issue is not so much that they don't know their mortgage rate," Lewis commented. "It's that they don't know that rates are a whole lot lower now."
Refinance rates now
According to Bankrate, refinance rates fell Jan. 10, providing many homeowners the opportunity to lower their monthly mortgage payments.
- The 30-year fixed-rate refinance rate landed at 4.04%, down from 4.09% the week before.
- The 15-year fixed-rate refinance rate ended at 3.16%, down from 3.25% the week before.
- The 10-year fixed-rate refinance rate came to 3.04%, down from 3.16% the week before.
While these rates trended down compared to the week prior, the overall direction of rates seems to be going up. Bankrate reported that a month ago, the 30-year fixed-rate refinance rate was 4%.
It's unknown where rates will go in the coming months. The economy has been in a good place, with the number of jobs increasing and consumer spending going up in the fourth quarter of 2016. As expected, the Fed also voted to increase the federal funds rate at the end of the year. Some economists think the Fed will make a similar move during one of the first four Federal Open Market Committee meetings of 2017, GOBankingRates reported.
Even though 2017 began with a dip in mortgage and refinance rates, there's always the possibility that they'll reverse direction in the future. Homeowners who don't know their mortgage interest rates would be doing themselves a favor by looking it up and comparing it to refinance rates available to them. Refinancing soon could save them some money in the long run.
Why veterans and active-service military homebuyers love VA loans [Infographic]
VA loans are one source of funding that an increasing number of qualifying homebuyers who are or have been in the U.S. military have found to be highly beneficial.
VA loans are available to qualifying active-service military personnel and veterans and are a wonderful benefit the U.S. Department of Veterans Affairs offers these brave men and women. Nearly three-quarters of active-service military buyers and more than half of veterans take advantage of the VA loan program.
There are plenty of reasons that could convince a qualifying member of the military to use a VA loan. If you are a qualifying member of the military, here are three important reasons to consider using a VA loan:
Most home loans either require a down payment of at least 20% or the purchase of Private Mortgage Insurance if you aren't able to provide that amount at the time of closing. However, VA loans don't require either. This means you may find they are a much more affordable option.
A VA loan can help in almost any of your homeownership goals, whether they involve to buying, building or refinancing. There are some requirements you'll need to meet to qualify. For example, the home needs to be your primary residence to be eligible.
For many loan products, there are certain qualifiers that allow you to obtain a loan or a low interest rate. For example, if you have a foreclosure or bankruptcy in your past, it may prevent you from getting a loan or an affordable interest rate. However, a VA loan is still obtainable with these financial hardships on your record.
Additionally, some lenders discourage early payments by imposing fees for pre-paying your bill. VA loans don't do this, which makes creating a payment plan that suits your lifestyle and income easy. If you prefer to make two smaller payments during the month instead of one bigger one, you can. Or, if you want to go ahead and pay your mortgage as soon as you get paid rather than waiting for your bill to come in, go right ahead.
What will your reason be for getting a VA loan for your next home purchase? With Veterans Day coming up on Nov. 11, many people and businesses will be saying thank-you to the brave men and women who have and are currently serving in our military. Tell the lenders at Academy Mortgage the next time you're in the market for a new house, and we will be happy to help you buy your perfect home.
Academy Mortgage is one of the top independent purchase lenders in the country as ranked in the 2015 CoreLogic Marketrac Report. Contact me to find a loan, get a rate, or calculate your payment today.