Why An FHA Loan Still Makes More Sense Than A Conventional Loan.
Here is a question a lot of first time home buyers and even seasoned pros ask.
Is an FHA Loan better?
Well let’s take a look at the numbers to see if we can figure this out together.
It all depends on your personal financial situation and your short/long term goals.
It generally does not make sense to sink a bunch of money into a depreciating asset unless you have a very long term goal in mind so
maybe that 20% down conventional mortgage isn’t the best option. This is just my humble opinion.
The other factor to consider is how much money you have left in reserves for emergencies after your down payment is subtracted.
Here are some numbers to consider.
Let’s say you’re looking at a home for $200,000 and you have a 720 credit score.
Here is how your pricing (rate) would look today.
On a conventional loan with 20% (or $40,000.00) down you would be looking at 5% 30 year fixed rate which would give you a monthly payment of $858.91 plus taxes and insurance.
On an FHA Loan with just 3.5% (or $7,000.00) down you would be looking at 4.75% 30 year fixed rate which would give you a monthly payment of $1,161.60 (including the monthly mortgage insurance) plus taxes and insurance.
That’s a difference of $302.69 per month for the first 5 years at which point the mortgage insurance drops off of the FHA Loan and the payment difference would go down to $157.94 per month.
Here are the numbers you really want to look at.
For the first 5 years the difference between the payments would look like this $302.69 X 60 months (5 years)= $18,161.40. Now take this number and subtract it from the $40,000 down payment and you get $21,838.60.
Now divide $21,838.40 by the difference in payment of $157.94 and you get 138.27 months or 11.52 years.
What does all of this mean?
It means that you would have to spend 16.52 years in the home and loan to recoup the $40,000 down payment when comparing the difference in the monthly payment.
Here is how it breaks down again.
For the first 5 years in the FHA Loan you would pay $18,161.40 MORE than the conventional loan.
For the next 11.5 years you’ll pay $21,838.60 MORE than the conventional for a total of $40,000.00.
In other words, you would be paying $40,000 upfront to save $40,000 in monthly payments for the next 16.5 years. How much money do you think that $40,000 could earn you in 16.5 years if it wasn’t tied up in your home?
It certainly looks like an FHA Loan is the better option, don’t you think?
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