What Could Your FHA Interest Rate Be Today?
Now is the ideal time to see what interest rates you could be approved for on a home loan. Home loan rates are at historic lows and there are no signs currently of significant increases in interest rates. But whether you plan on refinancing your current home or you’re buying a new home, now is as good a time as any to obtain financing and take advantage of these low rates.
Of course, you can’t talk about getting the best interest rates without talking about the choice between FHA loans and conventional loans. The general rule of thumb is that conventional loan rates and FHA interest rates are usually comparable, with a few exceptions.
FHA loans have certain features that make them especially attractive. For instance, with an FHA-insured loan, you can buy a home with as little as 3.5 percent down.
However, it’s worth noting that FHA mortgage interest rates can fluctuate on a daily basis and change dramatically from one lender to the next. In some lenders’ advertising, they may quote one rate, but then bring out a different rate when the time comes to actually write the contract. Fortunately, we here at MortgageAdvisor.com know how daunting this experience can be, so we’ve provided below a quick orientation of FHA mortgage rates and how they will affect your loan.
How Interest Rates Are Determined
Interest rates start with the U.S. Federal Reserve—otherwise known as the Fed—the organization that lends money to banks. When the Fed sets the interest rate on the loan amount they lend, that change in rates trickles down to home loans, including those provided by FHA lenders in your area. If the Fed’s rate goes up or down, you can expect FHA mortgage rates to do the same.
This is where conforming loans comes into play. Conforming loans are loans that have been sold to Fannie Mae, a government-owned giant in the mortgage industry. In order to be purchased by Fannie Mae, they must conform to the organization’s guidelines, hence the name ‘conforming loans’. This requirement to conform affects borrowers who may be considered risky. For example, they have low credit scores often requiring lenders to jack up loan costs. These cost increases are referred to as loan-level price adjustments (LLPAs) and can be imposed based on several factors, including:
- Borrower credit scores
- Loan-to-value ratio
- Property type
Most often, LLPAs are tacked onto the amount of the loan. They also increase the effective interest of the loan. And that’s why an FHA lender will advertise one rate, only to give you a higher one at signing time. Most likely, the lender isn’t trying to deceive you. Rather, they’re bringing your loan into conformity with Fannie Mae guidelines.
Understanding FHA Mortgage Rates
This is the general rule of thumb across all loans, home, auto, or otherwise: the riskier lenders think you are, the higher the interest rates will be on your loan. It’s their way of lowering their risk as investors. This can be an unpleasant truth for borrowers with bad credit or insufficient cash who end up getting high-interest rates again and again. One benefit of FHA loans, however, is how they get around this problem.
Unlike with conventional loans, FHA loans are insured by the government—in other words, the government will pay them back if you default on your loan—so whatever risk a lender sees in you is decreased. As a result, the lender can exercise more flexibility in the rates they offer to you; they might even give you a rate lower than you would find in a traditional home loan or refinance.
Lower interest rates, in turn, are one of the keys to making your purchase of a new home a good investment or a bad one, since they provide these three key benefits:
- Increase in the loan amount you can qualify for
- Lower monthly payments
- Less paid in interest over the life of the loan
Interested in finding out what your interest rate could be for an FHA Loan? Contact a Mortgage Advisor today.