Understanding FHA Loans
Here is an example of what your mortgage insurance premium (MIP) would look like assuming a sales price of $750,000, 5% down, $712,500 loan amount, and a 640-659 credit score…
FHA monthly MIP = $497.50
We arrive at $497.50 by taking the base loan amount, multiplying by .80%, and dividing by 12 (months).
Now, let’s compare this to a conventional loan with the same criteria…
Conventional PMI (Private Mortgage Insurance) = $744.15
With your 640 credit score, an FHA loan will lower your monthly payment by $246 a month.
On top of having a lower monthly mortgage insurance payment, FHA will offer lower interest rates. Looking at that same example above ($750k sales price, 5% down and 640 credit score), here are the lowest rates with no points (points are a cost to buy a lower-than-market interest rate).
FHA interest rate with no points = 2.375% (as of 11/3/21)
$2,818 = FHA principal and interest payment based on 2.375% (UFMIP financed*)
$ 497 = FHA MIP
$ 100 = estimated monthly homeowner’s insurance
$ 781 = estimated monthly property taxes
$4,196 = Total payment for an FHA loan with a 640 credit score
With an FHA loan in Thousand Oaks at 2.375% interest rate, $1,383 goes toward principal each month and this increases slightly each month as you pay down your mortgage.
Conventional interest rate with no points = 3.375% (as of 11/3/21)
$3,150 = Conventional principal and interest payment based on 3.375%
$ 744 = Conventional PMI
$ 100 = estimated homeowner’s insurance
$ 781 = estimated monthly property taxes
$4,775 = Total payment for a conventional loan with a 640 credit score
With a conventional loan at 3.375% interest rate, $1,146 goes toward principal each month and this increases slightly each month.
By going with an FHA loan instead of a conventional loan in this scenario, you lower your monthly payment by $579 a month PLUS an additional $237 a month will go toward principal each month for a combined benefit of $816 a month by going with an FHA loan for your Thousand Oaks purchase instead of a conventional loan.
There are some negatives with an FHA loan. An FHA loan will require an upfront mortgage insurance premium (UFMIP). This will be 1.75% of your base loan amount or $12,468 assuming a $712,500 loan amount. This fee can be financed or added to your loan amount instead of being paid in cash. Also, with a conventional loan, mortgage insurance is canceled (removed) automatically once you have 22% equity based on your original sales price. With FHA, your mortgage insurance premium is required for the life of the loan if you put less than 10% down. It’s required for 11 years if you put more than 10% down.