There are many good reasons why you should choose a mortgage loan insured by the Federal Housing Administration over a conventional loan. The FHA has been helping people buy homes since 1934 and it’s a great alternative to other lending options for families who want to buy their first home, people who have less than perfect credit score, or someone who doesn’t have a large amount of money to use as a down payment. FHA mortgage loans can be obtained with a credit score as low as 500, and by making a minimum of 3.5 percent down payment. However, you should remember that FHA loans come with a fairly large disadvantage. You will be required to pay mortgage insurance for at least 5 years.
Once you have taken into consideration all of the advantages and disadvantages of a Federal Housing Administration backed mortgage loan, and decided that this type of loan is your best choice, it is time to decide between a fixed-rate FHA loan and an adjustable-rate FHA loan.
The Fixed-Rate FHA Loan
The fixed-rate mortgage loan is the most popular type of FHA loan. Also known as the 203(b) mortgage loan insurance program, the fixed-rate FHA loan is a very good choice for first time home buyers. Some very important advantages that the fixed-rate FHA mortgage loan has are:
- The interest rate remains the same for the duration of the loan. If you are comfortable with the interest rate that you received from the lender, then the fixed-rate FHA mortgage loan will give you peace of mind for the years to come.
- The fixed-rate FHA loan allows financing for up to 96.5 percent of the loan amount. As a result of this, you will be able to make a low down payment, and your total closing costs will also be low.
- This is the only type of loan that allows 100 percent of the closing costs to be a gift from family, or funding from a government agency or a non-profit organization. Many of the closing cost charges can be financed, as opposed to conventional loans, where the borrower must pay 2-3 percent of the loan amount at the time of purchase.
- It’s easy to qualify for a fixed-rate FHA loan. If you have a low credit score, a bad credit history, your debt-to-income ratio is high, or if you have a bankruptcy that is more than 2 years old.
The Adjustable-Rate FHA Loan
Designed for people or families with low and moderate income, the adjustable-rate FHA mortgage loan (ARM) is a type of loan that features low initial costs. If interest rates are high, the adjustable-rate loan will keep the initial interest rate on your mortgage low, so you can qualify for the financing that you need. While, with this kind of loan, there is always the risk that the interest rates will increase, here are a few advantages that you should take into consideration before deciding:
- The interest rate may rise over the duration of the loan, but it may also decrease. Also, the interest rate cannot fluctuate more than 1 percent per year, and cannot increase by more than 5 percent of the initial rate.
- 25-day notice for increased interest rate. In case the interest rate on your adjustable-rate FHA mortgage loan increases, you will have to be notified at least 25 days before.
- Many of the closing costs can be rolled into the cost of the mortgage. This will therefore reduce the initial expense that will be involved in purchasing a home.
- Option of refinancing. You have the option of refinancing your adjustable-rate FHA loan to a fixed-rate FHA loan at any time through FHA’s streamline refinance program.
Both fixed-rate FHA loans and adjustable-rate FHA loans have their advantages, but choosing one over the other depends entirely on your situation. Understanding all the requirements, advantages and disadvantages is very important when considering any type of FHA loan.