Mortgage Interest Rates On Conventional Versus FHA Loans
This BLOG On Mortgage Interest Rates On Conventional Versus FHA Loans Was Updated On November 26th, 2018
Mortgage Interest Rates On Conventional Loans are more sensitive to credit scores and loan to value than FHA Loans.
- The higher the borrower’s credit scores, the lower their conventional mortgage rate
- For the lowest possible conventional mortgage rate, borrower should have 740 credit scores
- The more down payment they put down on a home purchase, the lower the rate
- For the best conventional mortgage rate, borrower should put down 25% down payment
- The higher the credit score, the lower private mortgage insurance is on conventional loans
- Putting less than 20% down payment is higher rates
With FHA Loans, here is how mortgage rates work:
- Credit Scores does affect mortgage rates on FHA Loans but not like conventional loans
- Borrowers can get the best FHA mortgage rates with 680 credit score
- Loan to Value on government loans such as FHA, VA, USDA Loans does have impact on rates if credit scores are under 680
Mortgage Rate Locks
A mortgage interest rates lock, also called a rate lock or rate commitment, is a lender’s promise to hold a certain interest rate and a certain number of points for you, usually for a specified period of time, while your loan application is processed.
- Depending upon the lender, borrowers may be able to lock in the interest rate and number of points that they will be charged when they complete the mortgage application and get disclosures back or, during the mortgage process
- Or borrowers can lock their loan once they get a conditional loan approval
- Mortgage interest rate locks should be done as soon as possible on refinance mortgage loans
- This is because if the mortgage interest rates rise, then the refinance mortgage loan may not go through
- Or the refinance borrower may need to wait until the mortgage interest rates come back down
- There are 15 day locks, 30 day locks, 45 day locks, and 60 day locks
- The longer the lock period, the more it will cost for the pricing adjustments
Shorter Term Mortgages And Mortgage Interest Rates
Shorter loans, such as a 20 year or 15 year note, can save homeowners thousand of dollars in interest payments over the term of the loan.
The monthly Principal and Interest Payments will be higher due to being amortized over a shorter period.
- An adjustable rate mortgage may get you started with a lower interest rate than a fixed rate mortgage
- Payments on ARM could get higher when the interest rate changes after the ARM fixed rate period is over
Larger Down Payment On Home Purchase
A larger down payment greater than 20% will give you the best possible rate.
- With a down payment of 5% or less, you should expect to pay a higher rate as you are starting with less equity as collateral on conventional loans
- If you’ve got the cash now and want to lower payments, borrowers can buy down rates with discount points to lower mortgage rate
- It’s a simple concept
- In exchange for more money up front, lenders are willing to lower the interest rate they charge, cutting the borrower’s payments
- Closing costs are fees paid by the lender, if you do not want to pay all of the closing costs, expect a higher rate which will pay the lender additional interest over the life of the loan
Credit And Debt To Income Ratios
Credit Scores and debt-to-income ratio affects the type of loans borrowers qualify for.
- Borrowers who have good credit and sufficient monthly income that surpasses monthly debt obligations, they will get lower debt to income ratios
- Borrowers who have monthly income that barely covers minimum debt obligations
- This holds true even if they have high credit scores, will not be eligible for certain loan programs due to debt to income ratio requirements