In times past, I was of the opinion that FHA loans, while attractive for low FICO score borrowers and/or those with little money for a down payment, were typically more expensive than "Conventional loans."

I have now changed my mind.

For certain scenarios, it now appears FHA loans are the better deal - and I will explain exactly why.

First - we must make sure we are comparing "apples to apples."

For this comparison, I will assume a pretty decent FICO score of 700. I will also assume that there is not too much equity in the house - let's say that the loan to value ratio is 95%. This means that if the home value is say, $400,000, then the loan amount is $380,000.

This is a fair comparison, as both loan programs (FHA vs. Conventional) will require mortgage insurance.

I have kept all other loan scenario variables the same.,

I just compared the rates and pricing on this "apples to apples" comparison, and I was somewhat surprised to see FHA at 4.375%.

When I ran the same scenario for a "Conventional" loan, the rate was 4.875%.

Now, let's compare the monthly mortgage insurance. For the FHA loan, the monthly payment would be a factor of .85%, or a monthly payment of $269.17.

For a Conventional loan, the monthly factor would be approx. 1.18%, or $373.67 per month..

Let's not forget, however, that the FHA loan also requires an Upfront Mortgage Insurance Premium of 1.0%. That equates to $3,800.

So - where does that leave us? The FHA loan has a lower interest rate and a lower monthly mortgage insurance payment. If you quantify those savings, it adds up to $218 per month.

But - since there is an extra cost of $3,800 for the Upfront Mortgage Insurance for the FHA loan, it would take about 17 months before you "break-even." That means, after 17 months, you are better off with an FHA loan with this scenario.

One final mention - next month the monthly mortgage insurance for an FHA loan will increase to 1.10%. That will increase the break-even point to 27 months.

FHA is still the better deal.

As you can see, there are a few variables that must always be taken into account -- so -- to figure out which loan program is best for you - talk to your preferred mortgage broker or mortgage banker.

I would also be glad to offer a free analysis of your situation to see what may work better for you.

Rick Pelleriti
California Mortgage Banker
530-205-9145
rpelleriti@ascenthq.com
www.California-Mortgage-Banker.com