MI comparison for FHA and Conventional Loans

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I received an email Monday afternoon inquiring about differences between mortgage insurance on FHA and Conventional loans. After replying to the email, I thought about it and couldn’t remember the last time I posted anything on this topic. There have been many changes to mortgage insurance for both conventional (premiums gone down if above average credit) and FHA (premiums gone up across the board) loans. Let’s take a look at mortgage insurance rates as they are today.

FHA Loan with a minimum down payment of 3.5% on a loan amount of $250,000:

  • there is an upfront one time mortgage insurance premium of 1.75% of the loan amount. In this case, $4,375 is added to the loan
  • the monthly mortgage insurance is based on a factor of 1.25% of the loan amount divided by 12 (months of the year)
  • in this example, the monthly mortgage insurance is $264
  • these insurance rates hold for credit scores down to 620

Conventional Loan with a minimum payment of 5% on a loan amount of $250,000:

  • there is no upfront one time mortgage insurance premium
  • the monthly mortgage insurance is based on a sliding scale. The higher the credit score, the lower the premium. Assuming the credit score is 760+, the monthly factor is 0.59%. That is less than half of the FHA equivalent! At a credit score of 660+, the monthly factor is 1.20%. That is still less than FHA’s.
  • in this example, the monthly mortgage insurance is $122 if excellent credit and $250 a month as long as the credit is at least 660.

As you can see from this 30 year fixed comparison, even with the minimum down payment, the numbers show a conventional loan can result in a lower monthly payment for the borrower based on:

  • no upfront mortgage insurance premium rolled into the loan
  • lower monthly rates on the mortgage insurance. The monthly payment is greatly reduced as one’s credit score increases
  • the numbers improve as the down payment increases on the loan

You might be thinking, “this is for a 30 year loan, what about a 15 year loan?” An excellent question! In the past when putting down 10% or more on an 15 year fixed FHA loan, there was no monthly mortgage insurance. This is no longer the case.

Today a 15 year fixed FHA loan still requires the upfront mortgage insurance premium and comes with a monthly premium of 0.60% of the loan amount if a 5% down payment and 0.35% if a 5-21% down payment. Assuming excellent credit, conventional loan mortgage insurance rates are either the same or slightly better than FHA on 15 year loans. As one’s credit score decreases, the rates on a 15 year fixed mortgage begin to look more attractive.

The moral of the story – generally speaking, the numbers show conventional loans result in a lower monthly payment in terms of monthly mortgage insurance costs. This becomes even more apparent as one’s credit score increases.

When should one consider using FHA? Again, generally speaking, if 3.5% is the only amount you can make for a down payment and/or one has less than average credit. That is where FHA loans may be more attractive, and in some cases, the only option.

How does one decide to go FHA or conventional? You should always talk with a mortgage professional who will ask you questions and give you a pro/con analysis of both loan programs. Be careful of working with someone who gives generalizations like “you are a first time home buyer, then an FHA loan is right for you” and then not provide any more details as to why the loan is right for you. If you are looking to buy or refinance a home in the state of Georgia, I’d be happy to help you put together a pro/con list when deciding between FHA and Conventional loans.

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