The answer to that question isn’t as black and white as one would hope. With the recent drop in private mortgage insurance (PMI) rates for Federal Housing Administration (FHA) loans from 1.35 percent of the annual mortgage balance to 0.85 percent, first-time homebuyers have even more things to consider when choosing a home loan.
According to a recent study by the Urban Institute, high loan-to-value ratio (LTV) financing through an FHA loan is more affordable than a conventional mortgage, regardless of FICO score. This interesting dynamic makes FHA loans more appealing to borrowers with high FICO scores as well as those with less-than-stellar credit.
But it isn’t as simple as that.
Conventional loans, now a little more unconventional
The conventional loan doesn’t look quite like it used to. Now there are options available with only 3-percent down from both Freddie Mac and Fannie Mae, and they may be even better deals for first-time homebuyers due to a lower-down payment (hey, 0.5 percent can add up) and mortgage insurance requirements that expire when the loan balance drops below 80 percent of the original amount.
Compare the numbers
So how can buyers help determine which type of mortgage is most cost-effective for them? Start by comparing these factors for each type of loan you’re considering:
● Down-payment requirement - buyers should always put down as much as possible, but at least there are flexible options that make homeownership more attainable than ever before -- from 3 percent to 5 and on up
● Length of time mortgage insurance coverage is required - mortgage insurance is required for the life of the loan with FHA mortgages versus expiring when the loan hits less than 80 percent of original balance with conventional loans
● Length of time you plan to stay in your home - if borrowers are planning to stay in their homes for a significant amount of time, an FHA loan may not be the most cost-effective option due to the PMI insurance requirement (for the life of the loan)
● Prepayment penalties - if you do plan on leaving your home before your loan term (usually 30 years) is up, consider whether prepayment penalties are part of the equation. FHA loans don’t require them, while some conventional loans do
To learn more about affordable new homes in Nocatee, visit nocatee.com or stop by the Nocatee Welcome Center.