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FHA vs Conventional Mortgages

by Joshua Bucio on March 18, 2013 · 5 comments

  
FHA vs Conventional Mortgage

There are a few different mortgage programs to choose from and each have their own benefit, depending on your situation.  The two most popular mortgage programs among most buyers recently, are the FHA mortgage and the conventional mortgage.  You can also read about an article I wrote about popular mortgage programs for first time home buyers.

Visual Graph

This visual graph shows you a great comparison of the FHA vs conventional mortgage for a potential home buyer.  I have stated the details of each program below, so you can compare the differences.  Take a look at the short-term and long-term differences.

Fha vs Conventional 2

Mortgage FHA vs Conventional 1

Details of Each Mortgage

Here are the details that are being used for both FHA and Conventional in the graph above.

FHA:

  • $200,000 purchase price.
  • 3.5% down payment.  (This is the minimum down payment for the FHA program.)
  • 3.75% fixed interest rate.
  • 30 year term.

Conventional:

  • $200,000 purchase price
  • 5% down payment.
  • 3.75% fixed interest rate.
  • 30 year term.

You can see the only difference I have from the details above is the down payment.  Typically, the larger the down payment, the less you have to borrower and the less interest you have to pay over the life of the mortgage.  Well, there are two items that make the FHA mortgage much different from the conventional mortgage.

Two Major Differences For FHA Mortgage

  • Upfront Mortgage Insurance Premium (MIP)

The upfront MIP is a cost that is required with a FHA mortgage.  This is a cost on top of your typical mortgage closing costs.  This upfront cost is typically rolled into the mortgage balance you are borrowing, so you are paying interest on this over the life of the mortgage.  Currently, the MIP charge for a 30 year term is 1.75% of your loan amount.

  • Monthly Mortgage Insurance (a.k.a PMI)

The mortgage insurance amount is a monthly payment, on top of your mortgage payment.  This monthly payment is required with FHA, regardless of how much of a down payment you have.  Currently, the monthly mortgage insurance payment for a 30 year term is 1.25% of your loan amount.  The FHA program requires you pay this for 5 years, before you can have it removed.

Conventional PMI vs FHA PMI

These premiums differ and typically the FHA PMI is more than the conventional PMI.  Also, with a conventional mortgage, you only have to pay the PMI until you reach 78% loan to value ratio.  (22% equity in the property)  The FHA PMI is required for 5 years of the mortgage, regardless of the equity position of the property.

Many home buyers that have a smaller down payment or lower credit score, will use a FHA mortgage.  Then, they make it a goal to refinance in the future, into a conventional mortgage, to elimiate the PMI they are required to pay with FHA.  When you refinance, you will need to have the property appraised and if you can show 20% equity in the property, you can avoid the PMI.  It’s not uncommon for a home buyer to pay PMI, since in many cases they are only paying it for a short period of time.

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{ 5 comments… read them below or add one }

Mark Ferguson March 18, 2013 at 8:34 pm

Good article. I would say rents are much higher in my area compared to mortgage payments on the same type of house.

Reply

Mike March 19, 2013 at 11:30 am

Good information and great looking graphs. What program are you using to generate these?

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Joshua Bucio March 19, 2013 at 1:05 pm

Thanks @Mark and @Mike. I use the program Mortgage Coach. It’s a great visual graph program that I can show my clients the short term and long term benefits of multiple mortgage options, whether they are buying or refinancing. I get lots of positive feedback on how it helps many clients understand the numbers and make a decision easier.

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Shaun April 3, 2013 at 2:32 pm

My understanding was that FHA was changing PMI to stay in place for the entire life of the loan.
Make FHA that much more distasteful from a fee perspective.

Reply

Amie July 9, 2013 at 5:11 am

Although I appreciate you illustrating the differences between FHA and Conventional financing, it is unclear why the APRs are different. Are they compounded on a different schedule? Also, I feel like your Rent vs Interest Paid over 15 years & Rent vs Principal Paid 36 Months graphs are misleading. The former implies that the only housing expense is the interest portion of the mortgage and neglects property taxes, maintenance, additional insurance and potentially additional utilities. The latter is again not an apples to apples comparison due to the expense issue again. These graphs as such it appears that the adgenda is to move people toward mortgages when that, quite often, does not lead to “bigger pockets”.

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