Monday, March 21, 2011

FHA Mortgage Rates Vs. Conforming Mortgage Rates : Which Are Cheaper?

FHA Mortgage Rates Vs. Conforming Mortgage Rates : Which Are Cheaper?

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FHA and Conforming Mortgage Rates 2005-2011
With the FHA insuring a greater percentage of mortgages than ever before, the stigma of "going FHA" is fading. And for good reason, too. The FHA offers a terrific mortgage product as compared to the conforming market.
With an FHA-backed loan, downpayment requirements are smaller, closing costs can be less, and 60% of the time, mortgage rates are lower than on a comparable conforming loan.

FHA And Conforming Mortgages : Key Differences

People tend to assume that a 30-year fixed is a 30-year fixed is a 30-year fixed.  The market doesn't work that way.  It's like saying a car is a car is a car. There are traits that make each product unique.
Yes, both the FHA and Fannie/Freddie back a product called the "30-year fixed rate mortgage", but beyond their identical, 30-year amortization schedules, the products are hardly similar.
As examples:
  • FHA mandates mortgage insurance on all loans. Fannie and Freddie do not.
  • FHA mortgage insurance lasts 60 months. Conforming mortgage insurance lasts until there's 20% equity in the home.
  • FHA mortgages can be assumed by a subsequent, qualified buyer. Conforming mortgages cannot.
  • FHA-backed homes must be free of defects and "issues". Fannie/Freddie homes may have small defects.
  • Fannie/Freddie require loan-level pricing adjustments. The FHA does not.
And, lastly, the FHA requires a minimum downpayment of 3.5% on a purchase. Fannie and Freddie want to see 5 percent, at least; oftentimes, 10 percent.

Mortgage Rates For FHA Mortgages And Conforming Mortgages

Another big difference between FHA and conforming mortgages is how they're priced.
Because FHA and conforming mortgages go to Wall Street through two different channels, it follows that their mortgage rates will always be slightly different. Some days, FHA rates and conforming rates move in the same direction.
Most days, they don't. Look at the chart at top.
Going  back 6 years, the average bank-reported interest rate for the FHA 30-year fixed rate mortgage has followed a very different path than the comparable conforming 30-year fixed.
The mortgage rate differential has been stark at times:
  • May 2006 : FHA 30-year fixed beat Conforming 30-year fixed by roughly 1 percent
  • January 2009 : Conforming 30-year fixed beat FHA 30-year fixed by roughly 1 percent
The data shows us that neither product is better than the other, per se. The right product for your home will depend on the market pricing of any given day. Even since last November, this is apparent.
In November 2010, 30-year fixed rate mortgage pricing in the conforming market was 1/2 percent better than the FHA market. Today, that's completely reversed. FHA mortgages are looking cheap right now.

Which Is Better : FHA Or Conforming 30-Year Fixed?

So which is better?  FHA or Conforming? It's a common question and the answer is "it depends". You have to look at every loan individually, and separately.
For example, not even the venerable FHA Streamline Refinance program is such a no-brainer.
Because of the FHA's new funding fees and accompanying mortgage insurance payments, there's several scenarios in which it makes more sense to eschew the FHA Streamline and opt for a standard, conforming rate-and-term refinance instead. You wouldn't think that to be true, but the math doesn't lie. You have to consider all of your options.
On purchases, the choice is a little bit simpler. As a basic rule of thumb:
  • Downpayment of 4.99% or less : Apply for an FHA mortgage
  • Downpayment of 5.00-19.99% : Ask your loan officer for a recommendation
  • Downpayment of 20% or more :Apply for a conforming mortgage
The rules aren't universal, of course. Credit scores and property type figure into the math, too, but it's a good start.

Get An FHA Rate Quote To Compare

To get a rate quote, you'll have to give a loan application to your lender. You can click here to send me an email to start your FHA or conforming mortgage application, after which, I'll send you accurate pricing for review.
Send the details of your situation. I'll help how I can.

1 comment:

  1. Informative Graph! FHA mortgage rates remain competitive as our lenders offer great interest rates for purchasing and refinancing home loans. Conventional mortgages usually require a much larger down payment than FHA mortgages. Thanks a lot...