Does it make the most sense for me to do conventional financing or FHA?
03-11-2015About MortgagesEddie KnoellThe question of the day from a customer who is looking to purchase a home and wants to know if a Conventional loan is better for them than a FHA loan. Here is the question:
“Our purchase price would be $240,000. We would like to get the mortgage payment down as low as possible. Doesn’t it make the most sense for us to do Conventional financing vs FHA? Would we not have to pay PMI for the life of the loan we did a Conventional loan? Another question we have is, what would we have to put down in order to get the mortgage payment close to $1,200? Thanks so much!”
Here is my answer
“When it comes to mortgage insurance, a conventional loan is better than FHA. FHA’s mortgage insurance is for the life of the loan. Typical monthly mortgage insurance on a conventional loan is eligible to be removed after 2 years if there is 20% equity with proof with appraisal and no late mortgage payments. However, I have a conventional mortgage product that you might like better. It is a ‘up front paid mortgage insurance’ . With a credit score greater than 760, you would pay a fee of 1.37% (you multiply the loan amount by 1.37% to calculate the cost)
If sales price is $240,000 and they put 10% down, the loan amount will be $216,000. If they pay an upfront mortgage fee of 1.37%, they will not have any monthly mortgage insurance ever. Their total payment would be estimated at $1,236/month
Upfront MI cost would be $2,959. You would pay this at closing but would never pay monthly mortgage insurance. If you elect to pay monthly mortgage insurance instead, you would pay approximately $81/month for mortgage insurance.”
| PURCHASE | PURCHASE | |
| LOAN OPTIONS: | CONVENTIONAL – 30 YEAR FIXED | FHA – 30 YEAR FIXED |
| Sale Price | $240,000.00 | $240,000.00 |
| Down Payment | 10% | 10% |
| Interest Rate | 4.000% | 3.500% |
| Points | – | – |
| Upfront MI | $0.00 | $3,780.00 |
| Loan Amount | $216,000.00 | $216,000.00 |
| Principal & Interest Payment | $1,031.22 | $969.94 |
| Taxes | $120.00 | $120.00 |
| Homeowners Insurance | $50.00 | $50.00 |
| Mortgage Insurance | $81.00 | $144.00 |
| Total Payment / Month | $1,282.22 | $1,283.94 |
| Note: Even though payments are identical, the FHA mortgage will be on there for a minimum of 11 years. | ||
| Total Closing Costs – ALL FEES | $2,700.00 | $2,700.00 |
| Total costs of points | $0.00 | $0.00 |
| Prepaid Taxes, Ins., and Interest | $1,400.00 | $1,400.00 |
| Upfront MI cost | – | – |
| Estimated Cast To Close | $28,100.00 | $28,100.00 |