You want to get the cheapest loan when you buy a house, and most people
think that's a conventional loan, and I'm gonna show you side by side why
FHA actually might be a better loan option for you because of a recent
change that's happened with FHA loans.
Now, everyone used to view FHA loans as a lot more expensive, or just for people who
really were on the edge of qualifying for a home, and that really just isn't true.
I'm gonna show you the cost savings that you can get with an FHA loan because of
some recent changes that have happened.
So conventional loans are not always the cheapest.
Everyone kind of defaults to them as the main loan that people want,
or it's gonna have the most cost savings, but it's not really true.
FHA is often a lower cost loan because of a new change and because of the way
FHA interest rates work and based on median home price in the US you could see
around $26,000 in savings in 10 years by choosing an FHA loan over conventional.
Okay, so, In February 22nd, 2023, there was this change
where FHA lowered their mortgage insurance from what it used to be.
Okay, so, let's talk about mortgage insurance with conventional compared
to FHA really quick and then we're gonna go through a side by side.
So I can show you exactly what these numbers look like.
Okay.
So mortgage insurance is required on a conventional loan if you put less than
20% down, and it's always required on an FHA loan no matter how much you put down.
And what mortgage insurance does is it only protects the lender if
you don't make payments on your mortgage and you default, it allows
the lender to recoup their money.
So it's required here on conventional, again, with less than 20% down.
Now, on conventional, you have monthly what's called PMI, Private
Mortgage Insurance, and it's around 0.5 to 0.7% of your loan balance.
And this is based on credit score mainly, but also how many
people are applying on the loan.
And a few other factors can change what your mortgage insurance
rate is on a conventional loan.
Now what's also interesting is you can remove mortgage insurance at
20% equity on a conventional loan.
So you buy the home, maybe you do the minimum 3% down on conventional, and then
over time you build up equity and then you can remove the monthly mortgage insurance.
On FHA, you can't remove mortgage insurance.
It never falls off.
It's fixed for the life of the loan.
FHA calls their mortgage insurance, MIP Mortgage Insurance Premium.
I know it's kinda confusing.
There's PMI and MIP, basically the same thing.
It's fixed now at 0.55% now.
It used to be last year 0.85%.
Now it's 0.55 and you can see that's on the lower range
compared to conventional loans.
And this is where we're gonna start building a lot of cost savings.
Now what's also weird about FHA is they have an upfront Mortgage
Insurance Premium of 1.75%.
That's 1.75% of your loan amount added to the loan balance.
Now, this is all confusing.
I'm gonna make it so easy.
I have a calculator that does all this math for you, compares it side by side.
We'll talk through that.
But I just wanna lay the groundwork here really quickly.
Now, even though FHA does have this upfront mortgage insurance that
conventional does not, FHA loans often have a lower interest rate compared
to conventional loans, and it used to be that because of the extra mortgage
insurance and when mortgage insurance was higher, that lower rate really
didn't compensate for the fact that FHA had all this mortgage insurance.
Now, because this monthly payment is lower or the monthly mortgage insurance
is lower, FHA now is a really attractive option compared to conventional loans.
Okay, so let's walk through real life comparison.
I have a calculator that I made called the Loan Clarity Advisor.
Okay, so the Loan Clarity Advisor is a software that you
can purchase on my website.
If you go to WintheHouseYouLove.com/advisor.
I only sell it for $17.
Other tools that do this will cost a hundred dollars per month.
All the other competitors are literally a hundred dollars per month.
This is $17 one time.
Okay?
And it's to help you understand how loans work side by side and
what's gonna be your best option.
Okay.
First, let's start with a scenario.
We're gonna enter in the purchase price.
I'm gonna do the median US home price, which is $436,800.
And if you're running along this with me, you're welcome to put in whatever
purchase price you are looking at.
So next we're gonna put in our loan options.
We're gonna do a conventional loan.
I'm just gonna call this, yeah, we'll just call it conventional
loan type, conventional.
The minimum down payment on conventional is 3%.
So we'll keep that.
We'll do a 30-year loan here.
The interest rate when I pulled a quote from this here with around a
740 credit score, it'd be a 7.25%.
This is just an educational example here.
We're not gonna do any points or fees because we just wanna
compare the loans themselves.
And then mortgage insurance was running around 247 per month.
Okay?
Now what we need to do is add in an FHA option as well.
So, I'll name it FHA, put in the loan type FHA minimum down on FHA is 3.5%.
We'll do 30 years.
And then the interest rate when I pulled this was 6.5%.
So already you can see there's quite a bit of difference in interest rate between
FHA versus conventional loans here.
Now the monthly mortgage insurance is automatically being calculated at 0.55%.
Like I talked about in the other slide.
This calculator does the math for you.
So now what we can do is scroll down and see which loan option
is the best at what point during.
The time that you have the loan because loans can be, have different
pricing, you know, depending on is it year five, year 10, year 15?
We wanna see what kind of savings we're getting throughout that time.
So we can use the slider here.
We can see over 30 years that's $50,000 or just shy of $50,000 in savings.
And if we go all the way, conventional is only the best option if we were planning
on selling or refinancing within two years, as soon as we get to year three.
And on FHA becomes the best option You can see over 10 years that you'd save
about $27,000 by going with the FHA loan compared to conventional, right?
And that's even with the conventional mortgage insurance falling off.
You can see right here in this purple line, this is the conventional loan.
Right here, there's a slight change in the angle of that line.
And that's because mortgage insurance is going to be falling off as time goes on.
We can see there's that slight slope that happens there.
Okay, so if we scroll down here, let's look at maybe 10 years is about the
average time somebody's in a home.
So we can see we're gonna save $27,000 by choosing FHA over a conventional loan,
even with upfront mortgage insurance.
Even with the mortgage insurance, that doesn't drop off on the FHA loan, right?
So if we look at the loan cost breakdown conventional, there's no
finance mortgage insurance, but on FHA it's 7,000, you know, $7,300.
The monthly mortgage insurance is actually higher on the conventional
loan than it is on the FHA loan, right?
Because of that new change, that new decrease that happened.
We're not comparing any lender fees or points so we can see
how the conventional loan.
Is actually $27,000 more expensive because we have so much interest
savings on this FHA loan.
Okay, now let's scroll down to the monthly payment here.
Something I want you to take a look at is if we hover over these, we
can see what makes up the monthly payment in red is mortgage insurance.
Now I want you to see what happens on the conventional loan as soon as we hit
year 12, the mortgage insurance drops off of the conventional loan, and if we
scroll up here, FHA is still a better option even though the mortgage insurance
fell off of the conventional loan.
It's just the math that's happening here.
Okay.
Everyone wants to vilify FHA loans, but they're not actually doing the math.
To compare which one is the true better option, and as we scroll
through, we can see the mortgage insurance on FHA decreases each year.
Okay?
That's a normal thing that happens on FHA loans.
It never falls off, but it does decrease as your loan balance decreases as well.
Okay, so let's look at year one.
We can see the monthly payment breakdown.
The conventional loan is $234 more per month than the FHA loan.
And that's primarily because we have lower interest on the FHA loan, and we
also have lower mortgage insurance, which is giving us a lower monthly payment.
Okay.
And it is important to keep in mind your monthly payment does change over time.
Okay.
We can see here the monthly payment, $234 per month cheaper as time goes
on, that does decrease and changes as the mortgage insurance changes as well.
Okay.
If we wanna look at your equity position, how much equity do you have
in your home during different years?
You know, maybe we look again at year 10.
How much equity versus your loan balance that you have.
Okay.
How much principal is paid versus the balance on the loan.
Okay.
And you can see that changes.
Over time, that loan balance here's your equity portion.
Okay.
And then also when we look at the loan details here we can see that
total mortgage insurance that's being added in here as well, along
with the mortgage insurance rate that's being calculated here on FHA.
And then also on a conventional loan, it shows us the mortgage
insurance falls off 11 years and 11 months which is that 12 year mark.
And on FHA, it never falls off.
Okay, so I just wanna reiterate, a lot of people do this thing where
they hear from somebody else.
It's like a game of telephone.
FHA loans are bad and they're more expensive go with a conventional loan.
And that can be true, but if we're doing the math or we use a tool like
this to do the math for us, because this took so many hours to create.
If you're using these tools, I wanna make information about what
loan is best for me based off of actual data, based on actual math.
Not off of, oh, I heard FHA was better.
I'm sorry.
I heard f I heard conventional was better, but when in reality
this loan option is better for me.
In math, like this gets even more interesting when you're comparing
these loans and comparing what it would look like to invest with
some of the savings that you get.
So again, let's look at let's look at our monthly payment here.
Our monthly payment, we're saving.
About $230 per month.
So actually built in a little investment calculator.
let's say we started with $0 and we invested that $230 per month in savings
because instead of, you know, let's say we were comparing conventional
versus fha, if FHA is giving us $230 per month in savings, What if we
took that savings and invested it?
Let's say we invested over 10 years and we got a modest rate of return of around 6%.
We would gain about $10,000 on that money with an imbalance of $37,000.
So there's a lot of things that you can do in here as you're
looking at comparing these loans.
What cost savings are you getting?
And then also what are you doing with that money?
And what can happen over, you know, the time that you have the
loan looking at investing, the difference that you would've had.
So again, when we look at this scenario, conventional had a rate of 7.25%.
FHA had a rate of 6.5%.
The monthly payment on conventional was just above $3,800 per month.
On FHA, it was $3,600 per month.
Okay, the mortgage insurance $247 per month, unconventional $191
on FHA because of the new change that's happened with FHA loans.
And if you wanna do all of this math or you wanna have a tool like
this to do it for you again, you can purchase that Loan Clarity Advisor
at WintheHouseYouLove.com/advisor.
And this can help you compare all different sorts of scenarios, FHA loans
with different down payments, conventional loans of different down payments,
paying points versus not paying points.
15-year versus 30-year.
Tons of different comparisons you can do right in here and know that
you're making the right decision on which loan you're choosing.
Okay, now before we get into the downsides of getting an FHA loan, because it's
not all about the money, is I do want to introduce you to our mortgage team.
So we have a mortgage team of helpful loan officers license and all 50
states of the US and we love to help you get a prequalification for a
loan and take a look at quotes before you start shopping for a house.
And we can help you take a look at FHA loans or conventional.
Or whatever works for you at WintheHouseYouLove.com/lender.
So my team would love to help you out.
Also, if you're looking to get connected with a helpful real estate agent.
I work with Home and Money, which is the best referral
network for real estate agents.
So if you're looking for a helpful real estate agent, you're like, I
don't know where to begin, and you wanna start looking at some homes you
can go to WintheHouseYouLove.com/agent to get connected with a
helpful real estate agent.
Now, some FHA downsides because even though you might save money, It
might not be the best option for you.
Okay.
Now one big thing is that it's only for primary residences.
If you're looking for a secondary home, not a second home, a secondary
home, meaning like a vacation home, you won't be able to get an FHA loan.
Also, the FHA appraisal is more strict than conventional loans.
So FHA tends to like move-in ready type homes unless you're doing
something like an FHA rehab loan.
Also FHA loans are less attractive to sellers.
So if you're in a really competitive market, your FHA loan might not
stand out as much, and that's because sellers don't like the extra hurdle
that an FHA appraisal can't have.
So it's important to keep that in mind that FHA is not the strongest compared
to, you know, if you're in a bidding war, that's something to be mindful of.
Now, I do wanna show you one trick that can make conventional
competitive with the FHA loan.
Now the trick to make a conventional loan cheaper than an FHA loan is
maybe you're in a really competitive area and you can't use an FHA loan
because it's not gonna be attractive.
So you need to use conventional.
What I'm gonna do is show you what's called an Interest Rate
Waiver with a conventional loan.
And I cover this in a rate hacking video that I'll show you here in just a minute.
So let's add a third option here.
What we're gonna call this is we're gonna call this conventional
and this is our waiver.
Okay.
Now to get this waiver we're gonna select conventional here.
You need to be under a certain income limit, okay?
And this is going to change based on your location but usually around 80%
of the Area Median Income limit, okay?
So if you get pre-qualified with us, we can help you explore these.
I'm also gonna cover this more in detail and a video that
I'll show you here in a second.
Okay?
So when you get this conventional rate waiver what we're gonna
do, same thing, 3% down.
This would put our interest rate at 6.75%.
Now it's still higher than FHA but not by a ton.
Okay.
Our monthly mortgage insurance is still gonna be around 247.
And what we'll see here is if we look again over, let's say 10
years, that FHA is still just a touch lower, but the conventional
waiver comes in super close to it.
Okay.
And this is going to be a really good option to be pretty competitive
with the FHA loan as it's you know, that mortgage insurance has changed.
And what's interesting is over time you can start to see you know, FHA is
the cheapest, you know, around year 10.
And then as soon as the mortgage insurance drops off of that
conventional rate waiver loan, all of a sudden in year 21 that conventional
rate waiver loan becomes cheaper.
Okay?
Now again, to be able to get this rate waiver, you do have to be
under an Area Median Income limit.
And to learn more about how to do this, I cover all of the rate
hacking strategy right here.
In this video, you'll learn about the interest rate waiver along
with how you can change your down payment to get a lower interest rate.