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How Much Can You Save with a 15-Year FHA Loan?
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Would you consider a 15-year FHA loan? While the 30-year fixed-rate mortgage is a popular loan option among homebuyers for affordability reasons, reducing your mortgage term can save thousands in interest over time.
Choosing a shorter repayment schedule comes with several benefits, but there’s a higher monthly cost that some homeowners can’t handle. Ultimately, the right mortgage for you will depend on your financial goals even more than on the total cost of the loan.
What is an FHA loan?
An FHA loan is a mortgage insured by the Federal Housing Administration, an arm of the U.S. Department of Housing and Urban Development.
FHA lenders tend to have more lenient mortgage requirements than conventional lenders, such as a minimum credit score of 500 with a 10% down payment. To qualify for the minimum 3.5% down payment, however, a 580 credit score is required.
To offset the higher risk of borrowers with lower credit scores and down payments, FHA loans require mortgage insurance premiums (MIP). This cost is paid over the life of the loan, in most cases.
How much can you save with a 15-year FHA loan?
Choosing a 15-year FHA loan means you’ll have a bigger monthly payment, but the savings over the life of the loan can be substantial. That’s because your interest rate will likely be lower than what lenders offer for 30-year FHA mortgage rates.
Just how much can 15-year FHA borrowers expect to save? Let’s look at an example, using LendingTree’s home loan calculator with published rates as of this writing:
|15-year FHA loan||30-year FHA loan|
|Monthly payment (principal and interest)||$1,684.68||$1,088.02|
|Total interest paid||$53,243.00||$141,685.69|
|Total loan cost||$396,079.78||$562,863.99|
In the above example, the borrower’s monthly payment with a 15-year FHA loan is nearly $600 higher than the payment for a 30-year loan, but they save more than $88,000 in interest paid over the life of the loan — and that means they’ll pay nearly $167,000 less, overall, for the loan.
FHA mortgage insurance premiums
There are two types of FHA mortgage insurance: upfront and annual. The upfront fee is 1.75% of the loan amount and is paid at closing. The annual MIP ranges from 0.45% to 1.05% of the loan amount, is divided by 12 and is paid in a monthly installment that’s added to your mortgage payment. The annual fee depends on your loan term, loan amount and down payment. Borrowers who make at least a 10% down payment only pay annual mortgage insurance premiums for 11 years.
Taking out a 15-year FHA loan won’t save you money on the upfront mortgage insurance premium, but it can cut down on your annual MIP costs. For example, with a minimum 3.5% down payment, you’d pay 0.70% of your loan amount with a 15-year loan term, compared to 0.85% for a 30-year term.
Pros and cons of a 15-year FHA loan
- You’ll likely have a lower interest rate. FHA 30-year fixed-rate mortgages usually have higher interest rates than 15-year loans. This means you’ll pay less in interest over time.
- Your mortgage insurance premiums are cheaper. As previously mentioned, 15-year FHA loans have lower annual MIP costs than loans with longer repayment terms.
- You can build equity faster. During the first few years of paying down your mortgage, more of your payment goes to interest than the principal balance. Since your loan term is shorter, you’ll pay down your loan principal and build home equity at a faster pace.
- Your borrowing power is limited. The same debt-to-income ratio requirements apply to people taking out 30-year and 15-year mortgages. If you’re looking to buy as much home as possible, a 15-year FHA mortgage isn’t the right loan for you, because your monthly payment will be significantly higher.
- You’ll have less financial flexibility. Something as simple as taking advantage of your employer’s company match in a 401(k) plan may be harder with a higher monthly mortgage payment. That’s why many homebuyers may start off with a 30-year loan and make extra payments over time to pay down their mortgage faster. Worst-case scenario, they can still cover the smaller monthly payments that come with a longer-term loan.
- You’ll lose some tax benefits sooner. Homeowners who itemize their tax deductions can claim a mortgage interest deduction based on the interest payments made on their loan. However, paying less interest leaves 15-year loan borrowers with a smaller deduction compared to those with a 30-year loan.
5 tips to find your best FHA mortgage rates
Regardless of whether you decide on a 30-year or 15-year FHA loan, keep the following tips in mind to get access to your best FHA mortgage interest rates.
1. Demonstrate your creditworthiness.You can get an FHA loan with a 580 credit score and put 3.5% down. But the higher your credit score, the better your interest rate will be.
2. Reduce your outstanding debt.Your debt-to-income ratio, or the percentage of your gross monthly income used to make your monthly debt payments, shouldn’t exceed 43%. If it’s close to the maximum, pay down your outstanding debt. Lenders want to know that you can comfortably afford a mortgage.
3. Reach out to multiple lenders.Compile a list of three to five FHA-approved mortgage lenders and gather quotes for current FHA rates. Shopping around for your best rate could save you hundreds or even thousands over the life of your loan.
4. Consider paying for points.If you have a sizable cash cushion, consider paying upfront mortgage points to reduce your interest rate. Each point costs 1% of your loan amount and can reduce your rate by up to 25 percentage points. On a $250,000 loan, one point would cost $2,500.
5. Make a larger down payment.Putting down more than the minimum can help you snag a lower mortgage rate and reduce your annual mortgage insurance premium. For example, making at least a 10% down payment on a 15-year FHA loan drops your annual MIP from 0.70% to 0.45%.