My wife and I have posted an offer on a house in Hawthorne NJ.  My Credit Rating is 716 and wife's is above 800.  The question I have is whether i should go FHA and pay a little bit more on monthly mortgage payment (which we can afford) while holding on to our cash savings OR put down 20%.  

It comes down to 5% (FHA) vs. ~4.5% (20% down)...can someone please advise?  Thank you so much!

Kumar - The choice is a personal one whereby keeping 15% of purchase price and investing elsewhere.  Keep in mind that the upfront MIP 1.75% (financed) and monthly MI on FHA should also be taken into account.  The FHA MI and MIP fees should be disclosed by your lender.  The desparity in rate between FHA and Conventional should not be a factor (at least not on my rate sheets here in TX).  Should you choose to go forward with FHA funding option - talk to your lender and/or go out and shop the rate.

You might consider a decision in the middle.  Why not put 10% and go with the FHA product?  That way you still preserve some of your cash reserves for emergencies and the mortgage insurance will drop off sooner than it would with the minimum down under FHA.  Remember that for the next 2 years, mortgage insurance is tax deductible [you could also pay the UFMIP in cash] and your mortgage interest amount will be higher for itemiizing.  So, there could be some side benefits.

If you don't have other liquid assets, it would be wise to keep some of the funds for emergencies.

I agree Kent. It would be different if houses were appreciating or lending guidelines made it easier to extract cash. Putting 20% down right now likely means that the downpayment will be locked up in the home and the funds would no longer be liquid. In many cases nowadays equity is no longer liquid asset :(.