The mortgage industry keeps changing and just recently there have been new changes regarding both FHA loans and USDA loans. USDA loans were great because they had no monthly mortgage insurance, but that will be changing soon. The comparisons that I will be showing will be using the new changes for both FHA loans and USDA loans, even though these changes haven’t taken place as of yet. Here are those new changes and when they take place.
***In the examples above, assume that both programs are creating the same profit margin for both the USDA loan and the FHA loan. And that all points and or fees are the same, with the same credit scores, but interest rates could be different.***
Now, this comparison is not truly apples to apples, because on a FHA loan, you need 3.5 percent down, as opposed to no money down on a USDA loan. In many cases, the USDA loan is about 1/8 to a 1/4 percent more in rate (each lender varies), but this would only add about $15 to $30 more to your monthly mortgage payment. As you can see, you would still be about $50 cheaper a month on the USDA loan.
Keep in mind, the figures I used in my example for the USDA loan is not 100% accurate, because of the USDA calculations for both the monthly mortgage insurance and for the USDA guarantee fee. It gets a little complicated and the end result is off by less than $1.50. And remember, as I stated in part 1, the monthly mortgage insurance on the USDA loans decreases a little every 12 months.
Conclusion : One thing that needs to be mentioned is that USDA loans are area specific and that there are income restrictions. Regarding a FHA loan, they can be used any where and have no income limits or restrictions. But as you can see, with a FHA loan, it would cost you more money at closing and that your monthly mortgage payment would be higher. The end result, based on the figures above, USDA loans would be better, if you can be approved for one. There are still goals to consider, meaning, how long one might stay in their home, which could change the outcome. But regarding money upfront and the total mortgage payment as of now, USDA loans are cheaper.
Key point : I had a loan officer tell me yesterday that FHA loans would be better after 7 years. One thing he failed to think about... On the USDA loan scenario, I am saving $7,000 upfront. To compare apples to apples, if I invested that money, I could make more than $1,500 in his scenario in 7 years. These are the things that are needed to be taken into consideration when showing a borrower their break even point.
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