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This UNDERRATED LOAN is CHEAPER than Conventional

Certified Mortgage Advisor
NMLS 1701021
Published 
July 13, 2023

FHA as the cheaper loan

You want to get the cheapest loan when you buy a house, and most people think that's a conventional loan, and I'm gonna show you side by side why FHA actually might be a better loan option for you because of a recent change that's happened with FHA loans.

Fallacy about FHA

Now, everyone used to view FHA loans as a lot more expensive, or just for people who really were on the edge of qualifying for a home, and that really just isn't true. I'm gonna show you the cost savings that you can get with an FHA loan because of some recent changes that have happened.

Conventional loans are not always the cheapest

Everyone kind of defaults to them as the main loan that people want, or it's gonna have the most cost savings, but it's not really true. FHA is often a lower-cost loan because of a new change and because of the way FHA interest rates work.

Based on the median home price in the US you could see around $26,000 in savings in 10 years by choosing an FHA loan over conventional.

Lowered insurance in February

So, last February 22nd, 2023, there was this change where FHA lowered their mortgage insurance from what it used to be.

Conventional vs. FHA

Let's talk about mortgage insurance with conventional compared to FHA really quick and then we're gonna go through a side-by-side. So I can show you exactly what these numbers look like.

20 % Mortgage Insurance is always required on Conventional

Mortgage insurance is required on a conventional loan if you put less than 20% down, and it's always required on an FHA loan no matter how much you put down. And what mortgage insurance does is it only protects the lender if you don't make payments on your mortgage and you default, it allows the lender to recoup their money. So it's required here on conventional, with less than 20% down.

PMI

Now, on conventional, you have monthly what's called PMI, Private Mortgage Insurance, and it's around 0.5 to 0.7% of your loan balance. This is based on credit score mainly, but also how many people are applying for the loan, and a few other factors can change what your mortgage insurance rate is on a conventional loan.

How to remove the 20%

Now what's also interesting is you can remove mortgage insurance at 20% equity on a conventional loan. So you buy the home, maybe you do the minimum 3% down on conventional, and then over time you build up equity and then you can remove the monthly mortgage insurance.

Monthly MIP fixed at 0.55%

On FHA, you can't remove mortgage insurance. It never falls off. It's fixed for the life of the loan. FHA calls their mortgage insurance, MIP Mortgage Insurance Premium. I know it's kind of confusing. There are PMI and MIP, basically the same thing. It's fixed now at 0.55% now. It used to be last year 0.85%. Now it's 0.55, and you can see that's in the lower range compared to conventional loans. And this is where we're gonna start building a lot of cost savings.

UFMIP at 1.75%

Now what's also weird about FHA is they have an upfront Mortgage Insurance Premium of 1.75%. That's 1.75% of your loan amount added to the loan balance. Now, this is all confusing. I'm gonna make it so easy. I have a calculator that does all this math for you and compares it side by side. We'll talk through that. But I just wanna lay the groundwork here really quickly. Now, even though FHA does have this upfront mortgage insurance that conventional does not, FHA loans often have a lower interest rate compared to conventional loans, and it used to be that because of the extra mortgage insurance and when mortgage insurance was higher, that lower rate didn't compensate for the fact that FHA had all this mortgage insurance.

Lower interest rate than conventional

Now, because this monthly payment is lower or the monthly mortgage insurance is lower, FHA becomes an attractive option compared to conventional loans.

Loan Clarity Advisor

So let's walk through a real-life comparison. I have a calculator that I made called the Loan Clarity Advisor. So the Loan Clarity Advisor is a software that you can purchase on my website. If you go to WintheHouseYouLove.com/advisor.

I only sell it for $17. Other tools that do this will cost a hundred dollars per month. All the other competitors are a hundred dollars per month. This is $17 one time. And it's to help you understand how loans work side by side and what's gonna be your best option.

Let's start with a scenario

Here. we enteredthe purchase price. I'm gonna do the median US home price, which is $436,800. And if you're running along this with me, you're welcome to put in whatever purchase price you are looking at.

Next, we're gonna put in our loan options. We're gonna do a conventional loan. I'm just gonna call this, yeah, we'll just call it conventional loan type. The minimum down payment on conventional is 3%. So we'll keep that. We'll do a 30-year loan here. The interest rate when I pulled a quote from this here with around a 740 credit score, it'd be 7.25%.

This is just an educational example here. We're not gonna do any points or fees because we just wanna compare the loans themselves. And then mortgage insurance was running around 247 per month. Now what we need to do is add an FHA option as well. So, I'll name it FHA, put in the loan type FHA minimum down on FHA is 3.5%. We'll do 30 years.

Then the interest rate when I pulled this was 6.5%. So already you can see there's quite a bit of difference in interest rate between FHA versus conventional loans here. Now the monthly mortgage insurance is automatically calculated at 0.55%. As I talked about in the other slide. This calculator does the math for you.

More information you can customize

Now, what we can do is scroll down and see which loan option is the best and at what point during the time that you have the loan because loans can have different pricing, you know, depending on whether is it year five, year 10, or year 15. We wanna see what kind of savings we're getting throughout that time.

We can use the slider. We can see over 30 years that's $50,000 or just shy of $50,000 in savings. And if we go all the way, conventional is only the best option if we were planning on selling or refinancing within two years.  

 

When FHA becomes a good option?

As soon as we get to year three and FHA becomes the best option You can see over 10 years that you'd save about $27,000 by going with the FHA loan compared to conventional. And that's even with conventional mortgage insurance falling off. You can see right here in this purple line, this is the conventional loan. Right here, there's a slight change in the angle of that line. And that's because mortgage insurance is going to be falling off as time goes on. We can see there's that slight slope that happens there.

So if we scroll down, let's look at maybe 10 years is about the average time somebody's in a home. So we can see we're gonna save $27,000 by choosing FHA over a conventional loan, even with upfront mortgage insurance. Even with the mortgage insurance, that doesn't drop off on the FHA loan.

So if we look at the loan cost breakdown conventional, there's no finance mortgage insurance, but on FHA it's 7,000, you know, $7,300. The monthly mortgage insurance is actually higher on the conventional loan than it is on the FHA loan, right? Because of that new change, that new decrease that happened.

We're not comparing any lender fees or points so we can see how the conventional loan. Is actually $27,000 more expensive because we have so much interest savings on this FHA loan.

For Monthly Payment

Now, when you look at the monthly payment, we can see what makes up the monthly payment in red is the mortgage insurance.

Now I want you to see what happens on the conventional loan as soon as we hit year 12, the mortgage insurance drops off of the conventional loan, and if we scroll up here, FHA is still a better option even though the mortgage insurance fell off of the conventional loan. It's just the math that's happening here. Everyone wants to vilify FHA loans, but they're not actually doing the math.

To compare which one is the true better option, and as we scroll through, we can see the mortgage insurance on FHA decreases each year. That's a normal thing that happens on FHA loans. It never falls off, but it does decrease as your loan balance decreases as well.

We can see the monthly payment breakdown

So let's look at year one. The conventional loan is $234 more per month than the FHA loan. And that's primarily because we have lower interest on the FHA loan, and we also have lower mortgage insurance, which is giving us a lower monthly payment.

It is important to keep in mind your monthly payment does change over time. We can see here the monthly payment, $234 per month cheaper as time goes on, that does decrease and changes as the mortgage insurance changes as well.

Equity Position

If we want to look at your equity position, how much equity do you have in your home during different years?

You know, maybe we look again at year 10. How much equity versus your loan balance that you have? How much principal is paid versus the balance on the loan? And you can see that changes. Over time, that loan balance here's your equity portion.

Then, when we look at the loan details here we can see the total mortgage insurance that's being added in here as well, along with the mortgage insurance rate that's being calculated here on FHA.

Also, on a conventional loan, it shows us the mortgage insurance falls off 11 years and 11 months which is the 12-year mark. And on FHA, it never falls off. So I just wanna reiterate, a lot of people do this thing where they hear from somebody else. It's like a game of telephone.

Are FHA loans really that bad?!

FHA loans are bad and they're more expensive go with a conventional loan. That can be true, but if we're doing the math or we use a tool like this to do the math for us because this took so many hours to create. If you're using these tools, I wanna make information about what loan is best for me based on actual data, based on actual math. Not off of, oh, I heard FHA was better. I'm sorry. I heard f I heard conventional was better, but when in reality this loan option is better for me.

Big savings that you can invest

In math, this gets even more interesting when you're comparing these loans and comparing what it would look like to invest with some of the savings that you get.

So again, let's look at let's look at our monthly payment here. Our monthly payment, we're saving about $230 per month. So actually built in a little investment calculator. Let's say we started with $0 and we invested that $230 per month in savings because instead of, you know, let's say we were comparing conventional versus FHA if FHA is giving us $230 per month in savings. What if we took that savings and invested it? Let's say we invested over 10 years and we got a modest rate of return of around 6%. We would gain about $10,000 on that money with an imbalance of $37,000. 

So there are a lot of things that you can do in here as you're looking at comparing these loans. What cost savings are you getting? Then, what are you doing with that money? And what can happen over, you know, the time that you have the loan looking at investing, the difference that you would've had.

Another Scenario

When we look at this scenario, conventional had a rate of 7.25%. FHA had a rate of 6.5%. The monthly payment on conventional was just above $3,800 per month. On FHA, it was $3,600 per month. The mortgage insurance is $247 per month, unconventional $191 on FHA because of the new change that's happened with FHA loans.

Loan Clarity Advisor

If you wanna do all of this math or you wanna have a tool like this to do it for you again, you can purchase that Loan Clarity Advisor at WintheHouseYouLove.com/advisor. This can help you compare all different sorts of scenarios, FHA loans with different down payments, conventional loans of different down payments, paying points versus not paying points. 15-year versus 30-year. Tons of different comparisons you can do right in here and know that you're making the right decision on which loan you're choosing.

Pick a helpful team

Before we get into the downsides of getting an FHA loan, because it's not all about the money is I do want to introduce you to our mortgage team. So we have a mortgage team of helpful loan officers licensed and all 50 states of the US and we love to help you get a prequalification for a loan and take a look at quotes before you start shopping for a house. And we can help you take a look at FHA loans or conventional or whatever works for you at WintheHouseYouLove.com/lender. So my team would love to help you out.

Also, if you're looking to get connected with a helpful real estate agent. I work with Home and Money, which is the best referral network for real estate agents. So if you're looking for a helpful real estate agent, you're like, I don't know where to begin, and you wanna start looking at some homes you can go to WintheHouseYouLove.com/agent to get connected with a helpful real estate agent.

Only for Primary residences

For FHA downsides, because even though you might save money, It might not be the best option for you. Now one big thing is that it's only for primary residences. If you're looking for a secondary home, not a second home, a secondary home, meaning like a vacation home, you won't be able to get an FHA loan.

FHA appraisal is more strict than conventional loans

So FHA tends to like move-in ready type homes unless you're doing something like an FHA rehab loan.

FHA loans are less attractive to sellers

So if you're in a competitive market, your FHA loan might not stand out as much, and that's because sellers don't like the extra hurdle that an FHA appraisal can't have. So it's important to keep that in mind that FHA is not the strongest compared to, you know if you're in a bidding war, that's something to be mindful of.

One trick that can make conventional competitive with the FHA loan

Now the trick to making a conventional loan cheaper than an FHA loan is maybe you're in a really competitive area and you can't use an FHA loan because it's not gonna be attractive. So you need to use conventional. What I'm gonna do is show you what's called an Interest Rate Waiver with a conventional loan.

So we added a third option. What we're gonna call this is we're gonna call this conventional and this is our waiver. Now to get this waiver we're gonna select conventional here. You need to be under a certain income limit. And this is going to change based on your location but usually around 80% of the Area Median Income limit. So if you get pre-qualified with us, we can help you explore these.

3% down for Conventional Rate Waiver

So when you get this conventional rate waiver what we're gonna do, is the same thing, 3% down. This would put our interest rate at 6.75%. Now it's still higher than FHA but not by a ton. Our monthly mortgage insurance is still gonna be around 247. And what we'll see here is if we look again over, let's say 10 years, that FHA is still just a touch lower, but the conventional waiver comes in super close to it. This is going to be a really good option to be pretty competitive with the FHA loan as it's you know, that mortgage insurance has changed.

Yes, FHA is the CHEAPEST!

What's interesting is over time you can start to see you know, FHA is the cheapest, you know, around year 10. Then as soon as the mortgage insurance drops off of that conventional rate waiver loan, all of a sudden in year 21 that conventional rate waiver loan becomes cheaper. Now again, to be able to get this rate waiver, you do have to be under an Area Median Income limit.

And to learn more about how to do this, I cover all of the Rate Hacking Strategy right here. In this video, you'll learn about the interest rate waiver along with how you can change your down payment to get a lower interest rate.

Ask us a question →
Kyle Andrew Seagraves is Federal Mortgage Loan Originator (NMLS 1701021) licensed in all 50 states with the Dan Frio Team at Servbank, sb (NMLS 203463), an Equal Housing Lender. Separately, Kyle owns Win The House You Love LLC, an education company. Win The House You Love LLC is not a lender, does not issue loan qualifications, and does not extend credit of any kind. This website is only for educational usage. All calculations should be verified independently. This website is not an offer to lend and should not directly be used to make decisions on home offers, purchasing decisions, nor loan selections. Not guaranteed to provide accurate results, imply lending terms, qualification amounts, nor real estate advice. Seek counsel from a licensed real estate agent, loan originator, financial planner, accountant, and/or attorney for real estate, legal, and/or financial advice.

Servbank, sb is not affiliated with the VA, FHA or any other government agency. This site has not been approved by any government agency.

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