FHA Loans – Fixed


An FHA (Federal Housing Administration) mortgage is insured by HUD (Housing and Urban Development Agency). These loans offer borrowers a way to purchase a home with a smaller down payment. FHA mortgages are intended for the first-time homeowner whose credit is not as perfect as a conventional mortgage.

Guidelines and Parameters

FHA Mortgages are backed by the federal government and put into action by HUD. These loans  were established to allow a broader range of credit worthy borrowers to participate in becoming home owners. They allowed for expanded guidelines from conventional mortgages that did not require as much money down. These loans all have PMI (Private Mortgage Insurance) and an Up Front Fee as part of the cost to get one of these mortgages. They are intended for the first-time buyer or the occupying home owner.

30-year fixed rate

This is the most common mortgage that homebuyers compare rates to. The rate is good for 360 months (30 years) and is amortized over that time period to payoff.

20-year fixed rate

This rate is based on 240 months and as the term decreases to pay back, the payment owed increases.

15-year fixed rate

This mortgage will be due in full in 180 months. It will have an even higher payment than the 20-year term.


Who Is It Right For?

  • Have less than perfect credit history
  • Do not have the typical 5% down payment required to qualify for a conventional loan.
  • Want the benefit of a lower initial rate and monthly payment that will not change no matter how long they own the property.

PMI, Funding Fee, Credit requirements

FHA Mortgages come in many different types. Certain FHA mortgages are only for condominium purchases (203c), while some are for construction/renovation loans (203k) and others are for streamline refinances from one FHA loan to another. The main loan is typically the 203b.

All FHA loans have an Upfront Funding Fee (right now that is 1.75%) that is added to the loan balance in most scenarios. This fee goes directly to the FHA as part of their reserves for loans that may go bad.

All FHA mortgages have monthly private mortgage insurance. There is a minimum duration for PMI based on the down payment and loan type. The factor that computes the PMI can vary slightly depending on the loan type and loan to value.

Just like conforming mortgages, FHA mortgages have a “high balance” loan limit. This limit is county specific and can vary greatly even within the same geographic region.

Fixed Rate

Pros

  • Predictability. Homebuyers know how much interest there is to pay over the term of the loan.

 

  • Monthly payment is fixed and in early years consists primarily of tax-deductible interest.

 

  • Mortgages without prepayment penalties permit homebuyers to shorten the term of the loan at will by making periodic payments against principal—and, ultimately, lowering interest costs.

Cons

  • Stability comes with a price; interest rates on fixed rate loans are generally higher than starting rates on ARMs.

 

  • If you choose a low down payment option you may have to pay for mortgage insurance, which adds an additional monthly fee to protect the lender from risk of loss.

Adjustable Rate Mortgage

Pros

  • Lower initial rate and payment amount, this means you may be able to buy a larger home than you originally believed.

 

  • If mortgage rates fall borrowers need not refinance to take advantage of them, instead they are automatically lowered.

 

  • If borrowers choose an ARM and save money it creates a way to invest more. If a borrower saves $100 a month in an account rather than putting it towards a mortgage payment it yields a higher investment interest.

 

  • If a borrower does not plan on living in one place for long an ARM can offer an inexpensive way to purchase a home.

Cons

  • Rates and payments can increase drastically over the life of the loan. A 6 percent ARM could end up at 11 percent in just three years if rates continually increase.

 

  • The initial adjustment can come as a surprise.

Long Term

Pros

  • Predictability. Homebuyers know how much interest there is to pay over the term of the loan.

 

  • Monthly payment is fixed and in early years consists primarily of tax-deductible interest.

 

  • Mortgages without prepayment penalties permit homebuyers to shorten the term of the loan at will by making periodic payments against principal—and, ultimately, lowering interest costs.

Cons

  • This stability comes with a price; interest rates on fixed rate loans are generally higher than starting rates on ARM’s.

 

  • If you choose a low down payment option you may have to pay for mortgage insurance, which adds an additional monthly fee to protect the lender from risk of loss.

Short Term

Pros

  • Principal balance is reduced relatively rapidly compared to longer-term loans.

 

  • May have lower interest rates than a 30-year fixed and therefore offers a useful financial planning tool.

 

  • Permits outright home ownership in half the time with half the cost of interest of a 30-year fixed.

Cons

  • Higher monthly payments than those on a 30-year fixed make these loans more difficult to qualify for compared to longer-term loans.

 

  • Choosing a loan with a shorter amortization period reduces the number of homes an individual can afford to buy.

 

  • Monthly payments are roughly 15%-30% higher than they would be on a comparable 30-year fixed.

Bi-weekly fixed rate

Pros

  • Biweekly payment schedule speeds up amortization, interest costs, and shortens the loan term generally to between 18 and 22 years. Homeowners make 26 biweekly payments (13 annual).

 

  • Conversion to a 30 year fixed is generally permitted.

 

  • Lowers interest expense.

Cons

  • There is generally an additional charge for this service thus making it a very costly way to shorten the life of the loan and lower the interest expense.

 

  • The same effect can generally be achieved by obtaining a 30 year fixed mortgage and simply making an additional payment or two each year or by applying an additional sum to principal repayment when homeowners make a monthly payment.

 

  • As with other rapid-payoff mortgages homeowners trade total interest-cost reductions for reduced tax benefits.

FHA

Pros

  • Low down payment requirements to obtain loan easing the burden of qualifying.

 

  • The funding fee for an FHA mortgage can be included with the mortgage.

 

  • Less than perfect credit history allowed for FHA loans.

Cons

  • There is generally an additional charge for this service thus making it a very costly way to shorten the life of the loan and lower the interest expense.

 

  • FHA loans have a 1.75% funding fee that gets added to the amount borrowed.

 

  • FHA rates can go up to account for lower credit scores.

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