What a Low FHA Interest Rate Means for Your Budget
We encourage potential FHA loan applicants to comparison shop between the different types of real estate loans available. How do mortgage loan interest rates vary between conventional and FHA mortgages, for example?
The government’s consumer watchdog, the Consumer Financial Protection Bureau (CFPB), offers some very good advice to borrowers trying to learn more about how lower rates can save you money over the course of the loan.
And not just over the full 30-year period, either.
At ConsumerFinance.gov, you’ll find advice ranging from the usual “start preparing and saving for your home loan as early as possible” prompts, but also a great deal of encouragement to use an online mortgage calculator.
These online mortgage tools can help you determine how a lender’s interest rates will affect your monthly budget compared to other, lower rates you may have access to from a different financial institution.
So what exactly DOES a lower interest rate mean for your budget?
The CFPB official site uses an example involving a hypothetical house purchase in the State of Alabama. At the time of the CFPB report, interest rates there were reported from “most lenders” at 4.312%. But let’s assume that a conventional lender with FICO scores that don’t qualify for the most competitive rates is offered a mortgage loan interest rate at 4.5%.
The amount of interest you will pay at the five-year mark in a mortgage with a 4.5% is $38,806. At the time of this writing, the mortgage loan interest rate offered to the most qualified borrowers is at or near roughly 3.375%.
But let’s not use that rate, let’s consider what would happen if a borrower with FICO scores qualifying them for a 3.625% interest rat4e instead--obviously not everyone will qualify for the highest possible interest rate, after all.
The applicant who applies for an FHA home loan at a 3.625% interest rate pays $31,053 in interest over the first five years of the mortgage. And that is a savings of more than $7,700 compared to the conventional 4.312%.
That is a fairly substantial amount. If you are concerned that your credit scores aren’t good enough to warrant a lower interest rate, start reviewing your credit and work on establishing a reliable credit history with a year or more of on-time payments for all financial obligations. This, combined with other credit improvement tactics such as lowering your balances far below the halfway mark on your credit cards, will go a long way toward getting you to a lower interest rate thanks to your improved credit.
There's a Difference Between APR and Interest Rates
Choose Your Mortgage Lender Carefully
Getting Started With Your FHA Loan Application
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