FHA vs 3% Down Conventional Loan

FHA vs 3% Down Conventional Loan

Brook Johnson

I get this question all the time.

“I only have about 3% to 3.5% of the purchase price to put down on a down payment, which loan should I get?”

Great question. And in my opinion as of today an easy answer. Assuming you have decent credit about 720 or better, than you will want to get the conventional loan. As of today, March 2016, you have to pay the FHA an upfront Mortgage Insurance premium of 1.75% of the loan amount, so for a $417,000 loan, that is over $7,000. Then you have to pay an additional almost $300 a month in monthly mortgage insurance on top of the regular loan payment, and with FHA the mortgage insurance premium will never go away, so that will cost you an additional $113,000 over the life of the loan.

For the 3% down conventional, even though the interest rate is higher, the mortgage insurance premium is lower, so your total payment is actually lower by about $10, and you don’t have to pay them an additional $7,000 up front. That is a huge savings.  With this loan the Mortgage insurance will come off in approximately 7 years, so that will lower  your payment even more.

There is a 3rd option, its called Lender Paid Mortgage Insurance. This is basically, you get a higher interest rate but pay no mortgage insurance for the life of the loan. And, if you have decent credit, your payment is actually lower by about $80 a month for a $417,000 loan amount, so that will save you $28,800 over 30 years and you will never have to refinance. As an added bonus, the interest you pay on your home mortgage is tax deductible, whereas the monthly mortgage insurance premium  is not, so once again you actually get to deduct more on your taxes by getting a mortgage with lender paid mortgage insurance.

Check out this chart to compare: it is for a $417,000 loan using interest rates as of March 20, 2016

Loan Type FHA 3.5% Conventional 3% w/ Conventional 3% LPMI
Purchase price $432,124 $429,897 $429,897
Total Down Payment $15,124 $12,897 $12,897
Loan Amount $417,000 $417,000 $417,000
Interest Rate 3.375% 3.875% 4.375%
Estimate Closing costs $4,321 $4,299 $4,299
Upfront MI-financed $7,298 $0 $0
Payment $2,169 $2,152 $2,082
Principal & Interest $1,876 $1,961 $2,082
Mortgage Insurance $293 $191 $0
Lost money $112,778 $16,044 $0


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