Jan 102015

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By G. Steven Bray

The folks over at FHA probably shuddered in Dec when Fannie Mae and Freddie Mac announced they were lowering their min down payment to 3%. Buyers with stronger credit already were shunning FHA. Its only advantage was its lower down payment requirement, and that now was gone.

But FHA is fighting back. It announced this week a reduction in its mortgage insurance rates. (If FHA, Fannie, and Freddie all weren’t owned by the government, you’d think capitalism had broken out.)

The change leaves FHA looking good again. For a $200k home purchase, the monthly payment for an FHA loan would be roughly $100 lower than for a conventional loan. The difference is the result of the lower MI rate and lower interest rates for FHA loans. This analysis assumes a buyer with a 720 credit score.

The two remaining advantages for conventional loans are a slightly lower down payment – $1000 lower in this case – and lower total mortgage insurance. FHA still requires up-front MI, and its monthly MI lasts for the life of the loan. For conventional loans, MI automatically ends after about 11 years.

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