FHA over Conventional loan

[Krystof Pilisiewicz]

Hi,

You probably heard this question many times, but I`m puzzled what should I do.
I am working on a loan for a 2-family house in Queens, New York that I`m planning to purchase. After speaking with my mortgage broker, she tells me that she can get me a rate of 4.6% for a conventional loan and that is a great deal. I already own a 2 family house, but I`m planning to move out to the new house and use this as a primary residence.

She tells me that she can get me an FHA loan for 4.7% (3.7% +1%) and I would have to pay only 5% instead of 20% if I decide to take the conventional loan.

Do you think 4.6% for a conventional loan is good? Would you rather take the FHA loan and keep 15% in the pocket since you do not have to go with 20%? I`m not sure what to do.

Any help would appreciate it.

Thank you,

Kris

[Brian Nordman]

@Krystof Pilisiewicz There would be several factors that would dictate which loan I would choose. First, you need to consider the costs of the PMI. Depending on the cost of the property this can be quite a hit to your cashflow each month. If your property will cashflow just fine while paying PMI. I personally would would do the lower down payment option so you have more funds to sweep up more properties while the rates are low. But if your property does not cashflow the way you'd like while paying PMI I would consider putting down the 20%. With an FHA loan not only will you have the monthly PMI but you will also have an upfront PMI fee at closing which is generally around 1.75% of the loan amount. So this would also be another sunk cost and increase to your initial investment that you would not get back out. If you like the low down payment option I suggest you check out the Freddie Mac Home Possible Loan. Down payment requirement of 5% and the PMI rate is much lower than that of FHA. Plus once you reach 80% LTV the PMI automatically falls off whereas with FHA you pay PMI the life of the loan. Only way out would be to refinance in say 6-8 years once you reach 80% LTV at which time interest rates could be considerably higher than they are right now.