Mortgage borrowers are paying higher interest rates for FHA loans as compared to conventional ones for the first time in recorded history.
According to Ellie Mae, whose mortgage software suite touches more than three million loan applications annually, the average interest rate for an FHA loan hit 4.73 percent last month. This is the highest average rate for FHA loans since 2013 when Ellie Mae started tracking such data.
It also marks the first time that FHA mortgage rates exceeded conventional ones, and consumers should take note.
Traditionally, FHA loans are “cheap.” Over the last five years, their rates have trailed the rates on loans backed by Fannie Mae and Freddie Mac by seventeen basis points, on average; and, it’s not unusual to see spreads reaching 0.30 percentage points.
Today, the relationship is flipped.
The FHA loan is not the default low-down payment mortgage choice for buyers of homes anymore. There are other, less-expensive options.
For buyers with above-average credit buying single-family homes, conventional loans may be a better choice. 3% down payment loans such as HomeReady® and HomePossible®, save money as compared to the FHA’s low-down payment option. The Conventional 97 program is also an option.
FHA rates affect the calculus of doing an FHA-to-FHA refinance, too.
FHA-backed homeowners who relied on the simplicity of the FHA Streamline Refinance to get lower rates may now find it cheaper and better to refinance away from the FHA entirely. Conventional loans may offer better rates, cheaper mortgage insurance, and a better overall experience.
Plus, it’s a good way to stop paying FHA mortgage insurance.
There are situations when the FHA mortgage will be a fit. Two obvious examples are buyers of multi-unit homes; and buyers with credit that’s average or below average. FHA loans for house-hacking home buyers can also work well.
As FHA interest rates climb relative to rates for other loans, the advantages of going FHA diminish.
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