By: Joe Della Torre

If you are thinking of refinancing or purchasing a home in today’s real estate market then you might want to consider an FHA mortgage. Currently, Fannie Mae has added price increases to most types of mortgages so the rates you hear quoted by CNN, in your local paper, or in advertisements will most likely NOT apply to your transaction. The rate increases, or add-ons, are based upon your credit score, purpose of loan, and the ltv (mortgage balance as a percentage of the value of your home). None of these rate add-ons apply to an FHA mortgage so in many situations the FHA mortgage has a lower interest rate.  An FHA mortgage will offer you greater flexibility in the maximum allowable loan amount based upon your current appraiser value, less cash out-of-pocket in a purchase situation, and will allow more clients to qualify for a loan. Typically an FHA mortgage can be used to purchase or refinance a primary residence. FHA financing is allowable on a second home, on an exception basis, but guidelines are very restrictive on these exceptions, so check with your lender for your specific situation. The majority of FHA mortgages come with mandatory mortgage insurance regardless of the loan to value on the transaction, so an FHA mortgage is most effective in reducing costs in situations where a borrower is asking more than 80% financing. The FHA mortgage insurance premium has both an upfront charge of 1.5%, which can be financed into the loan, and then an ongoing monthly charge of .50%. FHA mortgages do not have income limitations but do have loan size limitations based upon the location of your home. Your lender will check to make sure you meet the guidelines.

Let’s look at an example of a mortgage payment in a refinance situation both as an FHA loan and as a conventional mortgage. We will assume the following: balance of current mortgage $195,800, value of home $220,000, the borrower’s credit score 670, and the monthly escrow payment (homeowner’s insurance and property taxes) is $150.

Conventional Rate

6.875% with zero points
Principal and interest
$1,286.27
Mortgage Insurance
$101.16
Escrows
$150
Total Payment
$1,537.43

FHA Rate

6.25% with zero points
Principal and interest
$1,207.55
Mortgage Insurance
$97.90
Escrows
$150
Total Payment
$1,455.45