Do FHA Loans Have Higher Interest Rates Than Conventional Loans

Q: I’m buying my first home. My mortgage broker thinks I can get an FHA mortgage loan which she said has a lower down payment. Don’t FHA loans have higher interest rates? Tammy, Bloomfield, NJ

A: When comparing mortgage loan options, you should look beyond just the interest rate and consider the Annual Percentage Rate (APR). The APR factors in the interest rate and other loan costs, including fees and mortgage insurance.

FHA loans always include mortgage insurance –both an upfront insurance premium and an annual insurance premium that is paid monthly. If the down payment on an FHA loan is less than 10%, then mortgage insurance is required for the entire life of the loan. Conventional loans only require private mortgage insurance (PMI) if the down payment is less than 20%. Private mortgage insurance is typically lower than FHA mortgage insurance premiums, especially for borrowers with good credit.

A major difference is that PMI on conventional loans can be canceled after the borrower reaches 20% equity in the home. Whereas, FHA mortgage insurance may be required for the entire loan term. FHA loans sometimes have lower interest rates than conventional mortgage loans especially when the buyer-borrower has a high credit score and a large down payment. While FHA loans may offer lower initial interest rates, the requirement for mandatory mortgage insurance can increase the overall cost over time.
You should compare both FHA and conventional loan options and analyze the full cost of each, including interest rates, mortgage insurance, and fees before making a decision. Thanks for your question, Tammy.

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