When you borrow money from a mortgage lender, you will be charged interest in exchange for getting the money. A home loan interest rate works like any other large purchase; interest is tacked onto the principal, which you pay in monthly installments. Mortgage rates for FHA loans are usually the lowest among all types of mortgages because they are backed by the federal government. Lenders are protected if a borrower stops making payments, so they are more inclined to offer better terms.
But before you use an FHA loan to finance the purchase of your home, it’s important to understand the details. You don’t want to run into any surprises when it’s time to make your first payment. For example, FHA loans often require borrowers to have homeowners insurance, which is just another cost you’ll bear each month. Learn more about FHA home loans and how they work in the sections below.
Most prospective home buyers choose FHA loans for their low down payment requirement. Many Americans, especially young homebuyers, do not have the means to make a huge down payment. Conventional mortgages often require up to 20 percent of the home cost upfront, which can add up fast. Mortgage lenders offer FHA loans with a down payment as little as 3.5 percent, depending on the borrower.
However, this low-down-payment does not come for free. Most borrowers using FHA loans to secure financing are required to have homeowners insurance. This insurance adds protection for the lender if the borrower stops making payments.
And while FHA mortgage rates tend to be lower compared to conventional loans, there are some buyers who may not qualify for great rates. Lenders use income and financial information to determine a borrower’s rate of interest. If you do not meet the qualifications, you may wind up paying the same or more in interest compared to traditional loans.
But what about homeowners looking to refinance rather than purchase a home? Refinancing is the replacement of an existing mortgage with a new one, often one that has better terms or better rates. In some cases, the best mortgage rates are reserved for homeowners looking to refinance into an FHA loan.
Like all home loans, FHA loans have their fair share of drawbacks. It is important to understand all the details of the loan before applying and getting approved. Depending on your financial situation, it may benefit you to work on improving your credit or boosting your savings before considering getting a loan.