Glinkonomics: Are FHA Loans A Bad Deal Due To Mortgage Insurance Costs?

Glinkonomics (Ilyce’s take on what’s going on in the economy this week), Ilyce discusses whether FHA loans are a bad deal due to mortgage insurance costs.

If you need a mortgage and can’t afford a 20 percent down payment, are FHA loans a bad idea? Recently, the Federal Housing Administration’s mortgage insurance has skyrocketed, making FHA loans more expensive than conventional loans.

Borrowers pay a mortgage insurance premium that benefits the lender as part of their monthly payments, and it protects the lender in case the borrower defaults. But according to a new report from WalletHub, a financial information and networking site, you can save between $1,740 and $12,026 in just over five years if you take out a conventional loan with private mortgage insurance over an FHA loan.

After the housing market crashed, the FHA loan volume skyrocketed 330 percent from 2007 to 2009. Now they’ve gone back to being the place of last resort. Reason being, many of the loans they made went bad and they’ve struggled to meet financial obligations. So the cost of an FHA loan has increased in order to better cover the cost of the program.

As a result, FHA mortgage insurance premiums have more than doubled since 2008. Five years ago, if you took out a loan for a median-priced home at $212,000, you would have paid $9,200 in FHA premiums over the first five years of the loan. But if you bought that same house today, it would cost $17,398 in premiums. That’s an $8,000 dollar increase for a home only priced at $212,000.

Lenders will normally cancel private mortgage insurance once the borrower has 20 percent equity in their home. However, the FHA won’t. So borrowers will not only pay more in the first few years of an FHA loan, they will continue to pay for it through the entire life of the loan.

All of this has created an interesting swing for first time buyers who are credit-challenged and can’t get a loan in the conventional market, because an FHA loan is far more expensive than a conventional mortgage. So if you can qualify for a conventional loan, you aren’t going to want to opt for an FHA or even a VA loan at this point.

WSB Radio’s Ilyce Glink Show – November 17, 2013

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About Ilyce Glink

Author of 13 books, including the bestselling 100 Questions Every First-Time Home Buyer Should Ask. Writer of the nationally syndicated column, “Real Estate Matters.” Top-rated radio host in Atlanta. Writer for CBS MoneyWatch.com. Managing editor of the Equifax Personal Finance Blog.
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