Consumers, be wary of two pricey home loans
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By Scott Sheldon  August 23, 2013 12:00 am

Getting a mortgage anytime soon? Two types of home loans are inherently pricier than their traditional mortgage counterparts, and we’re not talking subprime or private money.

If your credit score is below 680, you have little equity or you have credit blemishes, the fact is borrowing money will cost you.

FHA loans and conventional loans are the meat and potatoes of today’s mortgage market and represent the lion’s share of mortgage applications. So why are the most popular financing types so pricey? Let’s go over how these loans were created.


FHA overview

An FHA loan has two primary forms of mortgage insurance (insures mortgage lender against payment default), an upfront mortgage insurance premium (UFMIP) financed over the loan term e.g. 360 months, which is based on 175 basis points of the loan amount. An additional monthly insurance premium is also applied using 135 basis points of the loan amount.

Using a $400,000 home loan, for example, that’s an extra $486 added to the monthly mortgage payment for the benefit of carrying federal debt.


How payments break down

• UMFIP: $400,000 loan amount multiplied by .0175 (UMFIP) equals $7,000. Add the $7,000 to the loan amount and it equals the $407,000 financed loan amount. This figure determines the principal and interest payment.


• Monthly mortgage insurance: $400,000 multiplied by .0135 divided by 12 equals $450. This is the monthly premium that inflates the mortgage payment.


Conventional overview

The conventional loan is themost sought lowest cost mortgage available, right? Wrong! 


Mortgage Tip: 99.9 percent of mortgage companies won’t tell you when you’re comparing offerings. If your credit score is under 700, your conventional home loan is going to get very pricey very quick.


Unlike the FHA counterpart, there is no upfront mortgage insurance premium with just a monthly premium based on a varying range of percentage of the proposed loan amount. The higher the risk for the lender, the higher the price paid by the consumer.

Two factors which influence the price above and beyond anything else are loan-to-value and credit score.


How payments break down

Two scenarios financing $400,000:

• 1. 740 credit score, with 5 percent down-mortgage insurance based on 76 basis points.

• 2. 640 credit score, with 5 percent down-mortgage insurance based on 120 basis points.


Monthly mortgage insurance:

• $400,000 multiplied by .0076 divided by 12 equals $253.33 per month for a 740 credit score.

• $400,000 multiplied by .0120 divided by 12 equals $400 per month for a 640 credit score.


The price paid is $1.47 per point in credit score. By reducing the loan to value (putting more money down for example), a person with a lower credit score could receive a lower percentage of mortgage insurance on a conventional loan. However, while this is the case, even someone with a lower down payment and a higher credit score will typically secure a lower cost home loan. Conventional loans generally are a lower-cost option when compared with a loan insured by the FHA. Conventional weight credit score with risk, more strongly than the FHA.


Evaluating pricey home loans

What to consider when researching mortgage options:

• What is my credit score? What is my credit history? Could it be improved?


• What type of down payment do I have? Any home loan with less than 20 percent down will require monthly mortgage insurance, thus making the loan pricier.


• Can I put more money down? Buy less house and apply for less debt?


• Can I afford a higher monthly mortgage payment for the long haul?


• Is my monthly income enough to debt service all of my current liabilities and a proposed new mortgage payment? Talk to a mortgage company.


No matter what your situation is, a qualified mortgage professional should be able to help you evaluate the pros and cons of the pricier loans available in the market to determine which course of action is best suitable for you. 

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Scott Sheldon is a local mortgage lender, with over six years of experience helping people purchase and refinance primary residences, second homes and investment properties. Visit him at

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