Rising Mortgage Insurance Costs Could Make FHA Home Loans a Bad Deal for Many Buyers

The rising costs of mortgage insurance could make FHA loans a bad deal for many homebuyers. The Federal Housing Administration, or FHA, allows for low down payments for buyers even if that buyer has a low credit score, but it comes at a high cost.

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Many buyers who need a mortgage to buy a home but lack a 20 percent down payment look to the FHA for a home loan. The FHA permits buyers to put down a low down payment of only 3 percent. But that savings up front could cost you in the long run because of mortgage insurance premiums required by the FHA.

Mortgage insurance premiums have doubled over the last five years. Insurance on a median priced home – $212,000 – used to be just over $9,000 for the first five years. Now buying that same home today will cost more than $17,000 in that same time frame. FHA mortgage insurance premiums are likely to continue rising in the New Year.

What’s even more disturbing is that in most cases, even after the homebuyer has earned 20 percent equity in his home, the FHA won’t cancel the homeowner’s mortgage insurance premiums, unlike conventional lenders. Homebuyers will have to continue paying the premiums for the entire life of the FHA home loan.

The only way an FHA home loan could be beneficial is if a potential homebuyer has a credit score below 660 or if the potential homebuyer has a low down payment and can’t get decent financing through a conventional lender. But be prepared to pay more for the mortgage over the life of the home loan.

The best home loan option for you may not be the most obvious, and it’s important to explore all your options. Even though FHA loans are available, they may not make the most financial sense. If a buyer can wait to make a home purchase, it could make sense to wait until the homebuyer has increased his credit score or raised the full 20 percent down payment for the home.


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One Response to Rising Mortgage Insurance Costs Could Make FHA Home Loans a Bad Deal for Many Buyers

  1. Pingback: How Homebuyers Can Avoid Paying for Private Mortgage Insurance

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