FHA debt is a specific type of mortgage that is slightly different from other home loan products. While  an FHA loan is still a mortgage, it is important to understand the distinctions between FHA debt and other home loans so you can choose the type of mortgage that is best for your financial situation. 

Down Payment 

With a traditional mortgage, the general guideline is to save up at least 20 percent of the value of the home to use as a down payment. However, in most cases, this is a sizable chunk of money, making it difficult for many people to obtain when they are ready to purchase a house. It is possible to get a traditional mortgage with less than 20 percent down, but no lower than 5 percent. 

With an FHA mortgage, you can get financing for your home with down payments as low as 3.5 percent. This makes coming up with that down payment much more accessible and makes your dream of home ownership come true sooner than you might think. 

Interest Rate 

The interest rate you’ll pay on your home loan will depend on a number of factors, including your credit score, down payment, amount of loan and length of loan, to name a few. In general, the more money you can afford to put down, the lower your interest rate will be. This is the regular procedure for traditional mortgages, but what does it mean for FHA debt? 

The truth is  you will likely qualify for a lower interest rate with an FHA loan than you would with a traditional mortgage, even with a much lower down payment. This is because FHA loans are designed to help those who cannot afford traditional mortgages. The lender is able to recoup the income lost to the lower interest rate through the addition of mortgage insurance. 

Mortgage Insurance 

This is one of the major differences between traditional and FHA debt.  It also has the biggest impact on the amount you will ultimately end up paying over the life of your loan. If you wish to obtain a mortgage with a down payment that is less than 20 percent of the home’s value, you’ll need to pay for mortgage insurance. This protects the lender in the event that you are unable to make your payments. 

With a traditional mortgage, you’ll pay the mortgage insurance premium until the amount of equity you have built up in your home exceeds 20 percent. FHA debt, on the other hand, is structured so that you have to pay mortgage insurance for the life of the loan, no matter what size your down payment is. Over the complete loan period, this can add up to a lot of extra money. The only way to get rid of the mortgage insurance payments is to refinance your loan as a traditional mortgage once you have passed the 20-percent threshold. 

Which Type of Home Loan Is Right for You?

To decide if an FHA loan makes sense for your situation, you’ll need to weigh the pros and cons of buying a home now with a lower down payment or waiting until you have more money saved up. For example, if the real estate market in your neighborhood is on the rise, it may be worth it to get into a house now to avoid paying a higher price for the same home later on. 

For more help deciding which type of mortgage is best for you, call today to schedule an appointment at with Coastal Pacific Lending, Inc. at 888.214.8618.