My husband and I are first time home buyers and are learning about mortgage loans. I noticed that the FHA 30 year fixed mortgage rates are significantly lower than the regular 30 year fixed mortgage rates and was told that first time home buyers qualify for this lower rate. Is this true?
On the surface FHA has a cheaper interest rate, but the APR is much higher. Check out Wells Fargo's rate listings to see what I am talking about: https://www.wellsfargo.com/mortgage/rates/
Do not look at the interest rate but focus on the APR. Wells explains it this way "The APR includes the interest rate, fees, points, and mortgage insurance, and is therefore a more complete measure of a loan's cost than the interest rate alone."
FHA is notorious for sneaking in points, fees and very high rates of mortgage insurance which dramatically increases the long-term costs of the loan. If you can qualify for a standard fixed rate, then I would recommend this route.
FHA is probably your best option IF you have scores in the 600's and limited down payment capacity. If you've got 10%+ down and scores in 700-s, you'll save money by going with a conventional loan.
Think about it this way... FHA loan at 4% yields a P&I payment of 500$ Conv. Loan at 4.5% yields a P&I payment of 550$ BUT the FHA loan will likely have PMI premiums of 80-100$ per month and it will not fall off in most cases. The Conventional (with a 20% downpayment wont have PMI) with a smaller downpayment it will have PMI but it will be far less (lets pretend its 40$) and it WILL fall off at 78% equity though you can request it to fall off at 80%. Youll end up paying back much less with the Conventional loan. FHA - 600$ per month for life of loan. Conv.- 590$ per month for a few years then 550 after that. Make sense? These are arbitrary numbers just to make a point, but it nearly always works out better to choose a Conventional loan. Unless your a Vet, then you can get a lower rate with no PMI through a VA loan. Theyre the best in my humble opinion.