Federal Housing Administration (FHA) loans may have stricter requirements and bigger mortgage insurance premiums, but at least the interest rates are still low for now. As with conventional loans, this might be a good time to get an FHA loan because interest rates are predicted to rise in the near future. The increase won’t be substantial, but over time the small percentages will add up, making your FHA loan significantly more expensive than it is now.
What is a Federal Housing Administration Loan?
The Federal Housing Administration doesn’t actually give out the mortgage loan, but insures it against default. The Federal Housing Administration acquires the money needed to pay these claims through the mortgage insurance premiums that the homeowners are required to pay, if they acquire an FHA backed loan. Part of the mortgage insurance premium is paid up front at the time of closing, and is then paid in monthly installments after that.
FHA loans are similar to conventional loans, offered by Fannie Mae, Freddie Mac, or loans insured by the Department of Veteran Affairs. Like conventional loans, FHA loans are offered in various lengths, such as 30-year, 20-year, or 15-year; they can be fixed-rate or adjustable-rate; they can be made with full, low, or zero closing cost options.
The difference between conventional loans and FHA loans is the down payment, which is only 3.5 percent for FHA loans, and 5 percent or more for conventional loans. Another difference between the two types of loans is the fact that FHA loans don’t have such strict requirements in regards to the home buyer’s credit score. While lenders require the home buyer who applies for a conventional loan to have a high credit score, FHA loans can be given to people with lower credit scores.
Fixed-Rate or Adjustable-Rate
Current interest rates for 30-year FHA mortgage loans are lower than the interest rates for conventional loans. For example, the interest rate for a 30-year fixed-rate conventional loan is around 3.6 percent, while the rate for an FHA loan of the same length is only 3.2 percent. The interest rate for a conventional 5-year adjustable-rate loan is 2.1 percent, while the rate for an FHA adjustable-rate mortgage loan is slightly higher at 2.2 percent.
Fixed-rate FHA loans are a great choice for new home buyers. These types of mortgage loans will have the same interest rate until the loan is paid off and, with a down payment of only 3.5 percent, they allow you to finance the rest of the loan amount. Your closing costs can be paid with a gift or it can be financed, making it easier for you to qualify for the loan. Less than perfect credit scores and not so stellar credit history are not going to matter as much as they do when applying for a conventional loan.
Adjustable-rate FHA mortgage loans feature lower interest rates, but that doesn’t necessarily mean that you will save money over a fixed-rate FHA loan. Mortgage interest rates can jump up even a few percent over the life of the loan, increasing the overall cost of the loan significantly. Of course, there is always the chance that the interest rate will decrease, but based on recent predictions, it looks like the interest rates will continue their upwards trend.
It is hard to decide between a fixed-rate and an adjustable-rate mortgage loan based solely on the interest rates. Adjustable-rate FHA loans might seem more attractive, but there is always the risk that the interest rate can rise. Whatever type of FHA loan you decide to go with, remember this: predictions say that the economy will continue its growth, making interest rates go up. Whether it’s a fixed-rate or an adjustable-rate FHA loan that you need, this year might be the last time you can take advantage of interest rates this low.