Government Loan Or traditional Loan – Which is Better?
When comparing a Charleston, SC traditional loan to a Charleston, SC FHA loan what is the best method? Lowest total monthly payment or lowest total cost?
Lets look at a $100,000 FHA loan, with a rate of 5% (assume a 5% down payment). This loan will also have a financed Mortgage Insurance Premium (MIP) of 1.75% or $1750, making the total loan of $101750, and a monthly mortgage insurance premium of.50% or $41.66/mon. The p&i payment at 5% – $546.21/mon plus the $41.66/mon mortgage insurance(MI). The total payment is $587.87/mon including MIP (without escrows)
On a $100,000 traditional loan with a 5% rate the p&I will be $536.82/mon and the PMI will run $78.33/mon. The total payment is $615.15/mon including MI (without escrows). The FHA loan is cheaper in this example by $27.28/mon, 0r $327.36/year, or a 15 year savings of $4910.14
Clearly the FHA option works out better by far when comparing monthly payments, however you initially finance a slightly higher loan amount. The FHA loan works much better for the lower credit score higher loan to value customers because there are fewer adjustments for credit score based on loan to value. In this example both loans will pay off completely in the 30 year term. Both loans allow a request for removal of the mortgage insurance when the loan to value reaches approximately 78% (2 years traditional and 5 years FHA minimum). With the FHA loan allowing a smaller down payment, lower credit scores without adjustments, and more flexible underwriting FHA loans are garnering a larger market proportion in today’s real estate market. In the Charleston, SC real estate market FHA loans make up about 25-40% of the Charleston mortgages. With underwriting requirements continually getting more restrictive, these loans will continue to increase in market proportion.