FHA Loan Interest Rates: What You Need To Know Before You Shop

FHA loans are government loans, but FHA loan interest rates are not set by the government. These mortgages are funded by private lenders that set their own pricing according to their policies and market conditions. FHA mortgage rates, like rates of conventional (non-government) programs, rise and fall as financial markets change. Just like conventional mortgage rates, FHA loan interest rates are affected by global events, lender pipelines (how much business they have), the terms of the loan and the borrower's qualifications.

Other FHA costs, however, ARE set by the government, and changes in the law can radically affect the rates borrowers pay. It's important, then, for those considering FHA financing to keep on top of impending changes that can affect their costs, and time their purchases or refinances accordingly.

For example, FHA requires mortgage insurance -- both an upfront sum, which can be financed (added to the mortgage balance) or paid out-of-pocket, and an annual premium, which is divided by 12 and added to the monthly payment. Between 2008 and 2014, the annual premium increased several times from .5 percent for most loans to its current 1.35 percent. In addition, the upfront charge, which was 1.75 percent of the loan amount before April 5, 2010, has undergone several transformations -- increased to 2.25 percent, then lowered to 1.00 percent (the drop was supposed to offset an increase in annual premiums), and then it was bumped back to 1.75 percent (in addition to the higher annual premiums).

35M+
users have refinanced
using LendingTree.
Get free personalized mortgage rates in minutes

Shopping for an FHA Mortgage

There's more to it than simply comparing FHA loan rates among lenders. Borrowers should compare total FHA costs to conventional (non-government) loans like Fannie Mae's My Community Mortgage and Freddie Mac's Home Possible (both loans can be found using LendingTree's LoanExplorer).

Shopping for an FHA mortgage can be confusing. That's primarily because of the mortgage insurance that the government requires, and the way it is (or isn't) disclosed by mortgage lenders. One mortgage lender might advertise a $200,000 loan with a 3.95 percent interest rate, an APR of 4.037 and a payment of $949.

Basic Loan Information  
Type of Loan FHA
Loan Amount $200,000.00
Interest Rate 3.95%
Loan Term (in months) 360 months
Monthly Payment $949.08
Current Value of Property $208,000
Other Fees & Charges  
Origination Fee $2,080.00
The APR on this loan is 4.037%
 

Another lender promotes its loan with an APR of 5.959 percent and a $1,253.56 payment.

Basic Loan Information  
Type of Loan FHA
Loan Amount $200,000.00
Loan Amount (including upfront mortgage insurance premium) $202,700.00
Interest Rate 3.95%
Loan Term (in months) 360 months
Monthly Payment $961.89
Monthly Mortgage Insurance Payment $291.67
Upfront Mortgage Insurance Premium $2,700.00
Current Value of Property $208,000
Other Fees & Charges  
Origination Fee $2,080.00
The APR in this loan is 5.959%
 

Most people shopping for an FHA mortgage would think that the first loan is a much better deal. However, they'd be wrong -- both advertisements promote the exact same loan!

First, you should understand interest rate vs APR. The difference in these two loans is that one lender includes the mortgage insurance required by FHA and the other does not. However, mortgage shoppers need to know it's there. When shopping for an FHA home loan, consumers should know that there is a 1.75 percent upfront mortgage insurance premium that they'll have to pay and that monthly mortgage insurance premiums are added to the payment -- for the life of the loan. They range from .45 percent to 1.55 percent, with most people paying 1.35 percent. That means a loan with a 4.00 percent interest rate really has a 5.35 percent interest rate. That's not a minor detail!

FHA mortgage rates today are generally lower than comparable conforming loan rates, but their true costs (as disclosed in their APRs) are generally higher. This is primarily because of the high costs of mortgage insurance. However, Fannie Mae and Freddie Mac also impose surcharges -- the difference is that the non-government loan charges depend on the risk of the loan -- applicants with bigger down payments and excellent credit pay much less, while those with smaller down payments and poor credit pay much more. For example, a borrower with a 95 percent loan and a 639 credit score gets slapped with a 3.25 percent add-on. That's $6,500 for a $200,000 mortgage. FHA, on the other hand, would charge its same 1.75 percent charge, which is $3,000.

In general, the stronger the borrower, the greater the likelihood that a conventional loan is a better deal. Consumers should be aware of this fact and be prepared to compare both options.