An increasing number of first-time buyers opted for conventional, conforming loans rather than FHA-insured mortgages in January. Just 24% of first-time buyers went with an FHA loan in January while 59% of first-time buyers obtained conventional financing, reports the National Association of Realtors. In 2020, 57% of first-time buyers chose conventional financing—a 5% jump from 2019. NAR says FHA financing can often be more expensive due to the mortgage insurance. This comes down to a $15,270 difference in mortgage payments for a $300,000 home financed with a 2.7% 30-year fixed-rate mortgage and private mortgage insurance of 1.5%.
A borrower obtaining an FHA-insured mortgage pays $43,797 over the life of the loan in mortgage insurance (MIP) compared to only $31,908 in the case of loan backed by Fannie Mae/Freddie Mac where the borrower stops paying the monthly private mortgage insurance (PMI) on year 9 when equity reaches 20% the prior year. In addition, the borrower obtaining an FHA-insured mortgage pays an interest of $3,380 by rolling into the loan the upfront mortgage insurance payment (UPMIP) of $5,356 (0.85% of the base loan amount of $289,500).
Increasing role of GSEs in providing 3% down payment mortgages
Fannie Mae and Freddie Mac started offering financing for mortgages with a 3% down payment in December 2014, to increase homeownership among households who can afford to pay the monthly mortgage but lack the 20% down payment. The programs serve low income households with income of up to 80% of the area median income.
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