I have the 5% to put down on a Conventional loan but the PMI is lower with FHA.  If the interest rates are the same, should I look at any other factors when trying to choose between the two?  Thanks

FHA also charges a 1.75% upfront mtg fee. Now this can be financed above your loan amount but you need to take that into consideration when comparing the 2 products.

Fico score also plays a roll with Conventional where FHA it doesn't (unless your under 620, which wouldn't make you eligible for conventional anyway). FHA mortgage insurance stays with you for the life of the loan.  Conventional PMI does not.  So at some point if you stay in the home and your loan balance falls under 80% of it's value (some restrictions apply) you can request Conventional PMI to be removed.

Since interest rates are low this should have more consideration because the idea of refinancing out of it later may not make sense with higher interest rates coming around the corner.  You should plan on having the loan you get now, long term (or as long as you're going to stay in the home).

One other thing to consider is that FHA only requires 3.5% down. With the extra 1.5% you could buy down your interest rate on an FHA loan and get a lower rate and payment vs. conventional putting 5% down (from a monthly payment stand point).

If I get a FHA loan for 275,000, how much must I pay back before I can get rid of the insurance?  Must I refinance to get rid of it?

With FHA you would have to drop the balance under 78% of the original value.  You would have the option of refinancing to remove it, but what are the odds that by the time you home has enough value that rates would be low enough to justify a refi?  Remember, we are seeing some of the lowest rates in history right now.

Mike - 78 loan to value and a min of 60 payments

FHA offers 2 other main advantages over conventional loans:

1. An FHA loan is assumable, meaning that if someone were to buy your home, they may take over your mortgage as long as they qualify.  This could be an advantage if rates increased significantly down the road.
2. If you lose you job or are incapable of working due to an accident, you may be able to defer up to 12 months of payments on your mortgage to the end of your term.  This is a huge reason to consider an FHA loan!

Thank you for your reply!  I thought that after 12 years the FHA PMI removes itself? 

Here's my situation- My credit is 783, I have signed a contract to purchase a lakehouse for 149,500 with seller to contibute 4000 to my closing.  Taxes on that house are 1,200 per year and insurance should be about 1,400 per year.  It will be my primary residence.  My income is 50,000 annual. I own 3 homes free and clear, one worth 150000, one 100,000 and one 80,000 and also a vacant lot worth 50,000.  Total insurance I pay out is 1,300 per year. Total Taxes are about 2,300 per year I collect rent of 9,000 per year on one of the homes I own.  I have no car payments, no credit card debt.  I can come up with the 5%.  I don't plan to sell the house anytime in the future.  I believe I will be able to pay it down much sooner than the 30 yrs. Here in Alaska, FHA looks like 5.0 with no buy downs avail right now and Conventional is 5.0 with one point available to buy down to 4.5    I keep hearing that the rates should drop at least for a couple of days between now and then.  I don't see what part of Obama's plan would do that.  The overall effect of the Stimulis Package just seems to be across the board market turmoil and further loss in consumer confidence.  Money is available but no regulations which would hold the rates down.  I haven't heard of any plans which would change that, just a plan to dump more money into it and continue to hope for the best.  I am supposed to close April 30th.  Would you wait to lock, or go for one of those right now, and which one?  Thanks for your thoughts!

12 years would be a fair estimate on when the MIP would drop off of an FHA loan if you made minimum payments each month.  At that point it would automatically drop off.  You are able to get it removed earlier if you have paid the balance down faster, but it never drops off before the 5 year period.  This all assumes a 30 year mortgage.

The general consensus here is that there are many factors that should lower rates in the coming months, but you are always subject to other risks that could raise rates.  The factors are not entirely based on the Obama plan.  You may want to read through the Mortgage Rate Watch section under the Blogs/News tab above.  I would float at least to within 60 days, since that is less than a week away.  The longer the lock, the higher the cost to you.  You have plenty of time to weather the ups and downs of the rate fluctuations and can wait to pick a low spot to lock.

As far as which option is best for you, it would depend on how quickly you plan to pay down the mortgage.  My guess would be if you feel that you can pay the mortgage down under 80% of the property value within 3 years, the conventional loan would be better.  If it would be over 3 years, the FHA loan would be better.  Your broker should be able to do the calculations to give you a more accutrate answer on that topic though.

spot on Kent!

Is it LTV, or original price? I am closing on a FHA in about 60 days, and I was told I could apply to have PMI dropped when my mortgage was 80% of the purchase price. (I also didn't hear about the 60 payments)...

So my question would be, if I stay in the house for 5 years, and my house appreciates 10% in that time, and I pay down 10%, could I then apply to have the PMI removed on a FHA loan.

Purchase price - you cannot have the PMI removed with appraisal FHA requires natural amortization only. You would have to pay it down.

The monthly MIP is cancelled when the LTV equals 78% based on the lower of original sales price or appraisal, provided it has been paid for at least 5 years. (On a 15 year term, there is no specific minimum number of years that the MIP must be paid and it is cancelled as soon as the LTV is 78% or less.)

Kent on loans longer than 15yrs FHA will only remove the MI when your loan balance is 78% or lower of your base loan amount. You cannot remove the MI based on a current appraisal. I also thought that you could get it removed via appraisal after 5 yrs but looked up the mortgagee letter clem posted yesterday on another thread...

Gary Paetzold:

Kent on loans longer than 15yrs FHA will only remove the MI when your loan balance is 78% or lower of your base loan amount. You cannot remove the MI based on a current appraisal. I also thought that you could get it removed via appraisal after 5 yrs but looked up the mortgagee letter clem posted yesterday on another thread...

Here is the exerpt from ML 200-46:

Shortened UFMIP Refund Schedule

            As stated in Mortgagee Letter 00-38, for loans closed on or after January 1, 2001, the unearned premium refund schedule is shortened to a five year period.  This applies to refinances as well as loans paid in full.  The new refund schedule is attached to this Mortgagee Letter.

Canceling FHA's Annual Mortgage Insurance Premiums

o       Cancellation based on Initial Amortization Schedule:  Effective for all loans closed on or after January 1, 2001, FHA's annual mortgage insurance premium will automatically be canceled-once the unpaid principal balance, excluding the upfront MIP, reaches 78 percent of the lower of the initial sales price or appraised value based on the initial amortization schedule and pursuant to instructions contained in ML 00-38.  Although the annual mortgage insurance premium will be canceled as described, the contract of insurance will remain in force for the loan's full term.  This mortgage insurance premium cancellation provision applies only to loans insured under the Mutual Mortgage Insurance (MMI) fund.  The MMI fund does not include mortgages on condominiums or Section 203(k) rehabilitation loans, among others.

 Once the mortgage amortizes to a loan-to-value ratio of 78 percent, collection of the annual MIP will cease.  FHA will determine when the mortgage reaches the amortized 78 percent loan-to-value threshold based on the contract interest rate (initial note rate on adjustable rate mortgages) and the loan-to-value information provided to CHUMS by the originating lender, and will cease billing the servicing lender accordingly.  FHA's calculation of the 78 percent threshold will be predicated on the loan amount excluding the upfront MIP.

Effective May 1, 2001, FHA will provide the date at which the annual MIP will end.  The cancellation date will be available to lenders via the Case Query Screen located in the FHA Connection Single, Family Origination section and the Portfolio and Advance Notice reports located in the FHA connection SF Servicing section.  Lenders utilizing HUD's Frame Relay will be able to obtain the same information through the Portfolio Report and Advance Notice applications.

o       Borrower Initiated Cancellation:  In addition to mortgages that reach the 78 percent loan-to-value ratio threshold through initial scheduled amortization, borrowers can also request through their lenders cancellation of the collection of the annual mortgage insurance premium for those mortgages that reach the 78 percent threshold in advance due to prepayments (principal curtailment).  Those loans reaching the 78 percent loan to value threshold sooner than projected (but not sooner than five years from the date of origination except for 15-year term mortgages) due to advanced payments of principal will have the annual premium collections canceled upon the servicing lender submitting supporting information to FHA following the borrower's request provided that the borrower has not been more than 30 days delinquent on the mortgage during the previous twelve months.  As part of their annual disclosures to homeowners, servicers are to notify borrowers of their option to cancel the annual MIP in advance of the projected date by making additional payments of mortgage principal.  As stated in ML 00-38, the 78 percent threshold will be predicated only upon the initial sales price or appraised value, whichever was less.

Effective May 1, 2001, FHA will also provide the amount the loan balance must reach in order to cancel the annual MIP.  FHA will determine the loan balance at which the 78 percent threshold is met by excluding the upfront MIP.  The required loan balance data will be available to lenders via the Case Query Screen located in the FHA Connection Single Family Origination section and the Portfolio and Advance Notice reports located in the FHA connection SF Servicing section.  Lenders utilizing HUD's Frame Relay will be able to obtain the same information through the Portfolio Report and Advance Notice applications.  Servicing lenders should use the formula provided by SFPCS-Periodic described in Mortgagee Letter 98-22.

If the borrower initiates cancellation of the MIP prior to FHA's original calculated cancellation date, lenders shall submit cancellation information using the FHA Connection or EDI processes.  A separate Mortgagee Letter will be issued detailing the required information for the cancellation.

The cancellation is based on 78% of the original appraisal (or purchase price, if it was a purchase and the purchase price was lower than the appraisal),  not on the base loan amount and not a subsequent appraisal. 

I think I have that right.... let me know if you read it differently.

Kent - so I am trying to get this straightened out - It looks like we can use the orig. appraised value logged into connection. I don't see anything about a new appraisal. Did I miss it??

Kent Mikkola:

The general consensus here is that there are many factors that should lower rates in the coming months, but you are always subject to other risks that could raise rates.  The factors are not entirely based on the Obama plan.  You may want to read through the Mortgage Rate Watch section under the Blogs/News tab above.  I would float at least to within 60 days, since that is less than a week away.  The longer the lock, the higher the cost to you.  You have plenty of time to weather the ups and downs of the rate fluctuations and can wait to pick a low spot to lock.

I am closing on April 30 as well (USDA not FHA) so I am curious about your statement regarding picking a low spot.  Our lock window opens on Monday and we are trying to figure out what rate we should be targeting.  We've watched it go from 5.25 last Friday up to 5.75 as of late thiss afternoon.  We have talked about 5.25 with a point buydown to 4.75 if we can get there.  My question is whether 5.25 is a bit too high for a target?  I don't have the desire to press my luck in hopes of a sub-5 base rate but also don't want to hit the eject button in a panic when it hits 5.25.

Jeff - you should check out blogs/news section then go to rate watch. There is a awesome blog by Vic talking about our current enviroment!

Jeff:

I am closing on April 30 as well (USDA not FHA) so I am curious about your statement regarding picking a low spot.  Our lock window opens on Monday and we are trying to figure out what rate we should be targeting.  We've watched it go from 5.25 last Friday up to 5.75 as of late thiss afternoon.  We have talked about 5.25 with a point buydown to 4.75 if we can get there.  My question is whether 5.25 is a bit too high for a target?  I don't have the desire to press my luck in hopes of a sub-5 base rate but also don't want to hit the eject button in a panic when it hits 5.25.

Jeff,

I wouldn't suggest watching for a particular rate.  For example, if rates were to dip to 5.375% and then it looked like they were moving up again, you may choose to take what you can get and lock your rate.  If the rates hit 5.375% and they look to be going lower, you may want to wait to see if you can get CLOSE to the bottom of the dip, that could be 4.875%.

In this rate environment, I normally recommend floating to within 15-30 days while watching the market.  This time frame gives you enough time to recover from any rate increases that are due to normal market movements.  Locks within 30 days also cost the least.

I hope that helps.