Q: I read recently that more people are going with FHA mortgages these days, because they're easier to get and have a lower down payment requirement. I soon hope to be a first-time home buyer. Would an FHA mortgage be the best route for me?
A: An FHA mortgage may be the easiest way for you to get a home loan, but not necessarily the best way. A mortgage amortization calculator can help you quantify the pros and cons.
FHA insurance makes lenders more confident giving mortgages to borrowers with lower down payments and less of a strong credit history. This has become especially prevalent since the housing crisis -- according to the Federal Reserve, loans backed by government agencies like the FHA went from being 5 percent of all mortgages in 2006 to 40 percent by 2011.
Is FHA insurance a good thing for borrowers? Perhaps, if it is the only way you could qualify for a mortgage -- but there is a cost.
FHA insurance is funded by loan fees, so this can raise the cost of your monthly payments. Also, while making a smaller down payment may seem appealing, it means you will be paying interest on a greater portion of the cost of the house, which means paying considerably more interest over the life of the loan.
A mortgage calculator can help you quantify these costs. Get mortgage quotes on both an FHA loan and a prime mortgage to see the impact an FHA loan would have on your monthly payment. Then, use a mortgage amortization calculator to test your total cost over the life of the loan with different sizes of down payment.
Bottom line, you may find that a prime, non-FHA loan is the cheaper way to go -- if you can qualify for it. And if you can only qualify for a loan via FHA, you can still reduce your total interest expense by making a bigger down payment.