While it continues to be a good time to buy property, the long-term outlook is somewhat less certain, with the housing market hovering somewhere between steady and pre-recessionary. Thus, it may be smart for real estate investors and those looking to enter the market to know why mortgage rates fluctuate, what factors influence them, and when to apply for a mortgage.
Here is information necessary to understand FHA mortgage rates.
FHA mortgage rates are the rates borrowers are charged for Federal Housing Administration (FHA) mortgage loans.
Such loan rates vary by lender and can also fluctuate (although generally not as much as regular mortgage rates). For example, the national average rate for a 30-year FHA loan on Aug. 24 is 7.63 percent. That is down compared to 6.80 percent just a week ago.
This is a mortgage that is insured by the FHA, which does not actually lend money. Instead, lender participants in the FHA program provide homebuyers with government-backed funds.
Generally favored by first-time or lower-income homebuyers because of down payments that are lower than conventional mortgages – as low as 3.5 percent of the property’s purchase price — FHA loans hit 7.02% earlier in August, the highest in 21 years.
In terms of credit scores, those can be as low as 500. However, a score under 580 will usually require a bigger down payment. Note that these are FHA guidelines and that lenders may overlay their own qualifications.
There are also property requirements for FHA loans: the property must have one to four units, serve as the borrower’s primary residence, and pass a Federal Housing Administration appraisal.
In addition, with an FHA mortgage, the amount one can borrow depends on where they reside in the U.S. For this year, ranges for one-unit properties were $472,030 to $1,089,300.
Note that “government-backed” means the FHA insures the loan – for the lender, not the borrower. It assures the bank or other lender that, should the borrower default, they would not lose the money.
While not as much as regular mortgage rates, FHA interest rate averages do tend to be volatile, depending on the market as a whole. Rates, in general, can fluctuate daily. But they are not established or influenced by the FHA — they are set by the lender. What the FHA does do to protect homebuyers is regulate interest rates by putting caps and limits on them.
FHA loan rates generally trend lower than those for conventional loans, although when FHA mortgage insurance is added in, an FHA loan could wind up being costlier than a similar conventional loan. Premiums are generally more expensive, the smaller the down payment.
In fact, FHA loans frequently have APRs that are higher than similar conventional loans owing largely to the mortgage insurance, which shields lenders against loss if a borrower cannot make payments and the home is foreclosed upon. Thus, homebuyers should pay attention to the APR of any loan in which they are interested.
The mortgage rate a person ends up with hinges largely on factors including their down payment, credit score, the loan terms being sought, and housing market values.
Lenders generally view borrowers who put down a bigger down payment as less risky, since it signals to them that the borrowers have more at stake. Thus lenders favor those who put more cash down and are more apt to offer applicants better terms.
When it comes to getting a lower FHA interest rate, the borrower’s credit score is the No. 1 determining factor, particularly as first-time homebuyers, for whom the loans are especially popular, may not have the scoring for a conventional loan. A borrower’s interest rate can be markedly lower with a good credit score. Note that the average FHA mortgage recipient has a FICO score of 674 and a 6.41 percent rate.
If time is not of the essence, it might be a wise move for a borrower to first shore up their credit before trying for a lower interest rate. In so doing, one may wish to work with the lender to see what specifically can be done to improve their creditworthiness.
If someone has good credit but is pursuing an FHA mortgage loan because of a possible low payment, that may not be the most cost-effective option. That is because if one’s credit rating permits them to skirt pricey FHA mortgage insurance, they may be better off doing so.
One’s rate will also turn on the loan terms the borrower is seeking. While a shorter term can garner a lower rate, a higher monthly payment can be required.
Another possible way to get a lower rate is by buying the rate down, meaning paying “points” to the lender in exchange for a comparatively lower rate. A point equals one percent of the loan total. A lender will have to give up commissions to offer a lower rate. Thus, to compensate for that lost income, they can charge points.
To determine whether this is the right move, the borrower should first calculate the rate buy down cost, determine the amount that would be saved with the lower interest rate, and the amount of time it will take before they break even.
Some borrowers may choose an FHA adjustable-rate mortgage (ARM), which initially suppresses rates. However, such rates can increase depending on the housing market’s performance. Thus, it is widely recommended homebuyers think about an FHA ARM for stays that are short-term – between five and 10 years.
Before seeking an FHA mortgage offer, the homebuyer must decide the loan term they desire. While 15- and 30-year terms are most common, 10-year loans and other options may be available as well.
A shorter term like a 15-year fixed-rate mortgage will likely carry a lower interest rate, thus lowering the borrower’s overall expenses throughout the loan’s life, and potentially saving thousands of dollars in interest over time. That is in addition to lower annual mortgage insurance premiums. However, a shorter term will likely call for a higher monthly payment.
When one buys can be a huge factor in terms of getting a low FHA mortgage rate. Thus, the investor or homebuyer may want to carefully consider the timing of their application.
For instance, if there is a trend toward lower prices, individuals will want to take advantage of that to snag a lower rate before said rates, again, go up. This underscores the importance of assessing the overall market before pursuing a mortgage.
Some advisors suggest not getting a new car loan in the months leading up to an FHA mortgage application, as that could negatively affect the borrower’s debt-to-income ratio.
Note that FHA mortgage applicants can compare offers and rates, starting with their own bank or other financial institution with whom they have a relationship. When shopping, remember that an FHA loan rate may only be secured on an FHA-backed loan. Likewise, only administration-approved lenders can provide such rates.
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Housing affordability can go up with an FHA loan, which typically carries a relatively lower down payment and less-stringent credit score requirements. In addition to paying attention to timing, borrowers should shop around for the best rate possible.
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