Fundamentals of FHA Interest Rates and Fees

People learn from experience, but when it comes to buying a house, experience can be an expensive teacher. Better to study some of the fundamentals of mortgage loans in advance than to learn by making a costly mistake.

For many home buyers, an FHA mortgage will be their first experience with housing loans. If you are getting into the housing market for the first time, here are some important basics about FHA interest rates, fees, and other terms:

  1. FHA loan interest rates are not all created equal. Although FHA loans are backed by the US government, they are offered by private lenders that set their own interest rates. That means that FHA loan interest rates will vary from lender to lender, and the FHA itself encourages consumers to do some comparison shopping to get the best deal.
  2. It's not just the interest. When comparing FHA interest rates to those of conventional (non-government) loans, don't forget about the mortgage insurance. Currently, FHA insurance costs 1.75 percent up front (which can be wrapped into the loan) and then (for most loans) 0.85 percent of the loan balance annually. Mortgage insurance premiums for conventional loans vary according to the borrower's credit rating and other factors. Finally, conventional mortgage insurance drops off once your loan is paid to 78 percent of your home's purchase price, but FHA mortgage insurance remains until the loan is paid off entirely.
  3. Short rates are generally lower than long rates. Another way you can cut your interest expense is by choosing a shorter loan. Shorter-term loans typically have lower interest rates than longer-term ones, and they also save you money in the long run because you pay interest over fewer years. Mortgage insurance is less expensive for shorter loans also. The only drawback is that paying the loan back in less time results in higher monthly payments, but if you can fit those higher payments into your budget, a shorter loan could save you thousands of dollars.
  4. Look at the loan fees. Mortgages have several costs – interest, mortgage insurance (when required), and loan fees. Lenders disclose their fees on a Good Faith Estimate, or GFE. These fees may be paid by you, or the lender can pay them for you if you're willing to accept a higher mortgage rate.
  5. Let's make a deal. Because FHA loan interest rates and fees are set at the discretion of the lender, there is often some room to negotiate. Let each lender know that you are comparing them with other alternatives, so they will have to be competitive to get your business. Taking the time to try to bargain for a lower interest rate may result in you saving money for years to come. Tools like LendingTree's LoanExplorer, which displays loans complete with their rates, mortgage insurance, fees and monthly payment, can really simplify the process. Another tool called Mortgage Negotiator can tell you if an offer you have is a good one, or if there are lenders that can beat it.

Because mortgages are long-term loans, once you commit you are going to live with the results for a long time. Paying attention to the fundamentals of FHA mortgages up front will help make living with your loan more manageable for years to come.

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