FHA Loan Rates
FHA mortgage rates differ from conventional mortgage rates in many ways. The Federal Housing Administration, which oversees the FHA home loan program, provides loose guidelines for interest rates on FHA loans. However, it is up to the lender to determine the exact rate. The purpose of requiring FHA loan rates (and interest rates, in general) is to compensate the lender for providing the funds up front.
Interest can be defined as money paid in regular installments by the borrower for the use of lent money. FHA interest rates are fixed percentages of the entire loan amount that increase the total amount owed by the borrower. The interest rate helps determine the overall monthly payment for which a borrower is responsible. Like conventional loans, FHA loans have the option of variable interest rates.
Current FHA mortgage rates generally vary between 3.5 and 5 percent, though lenders may require borrowers pay alternate percentages. The rate of interest on an FHA loan depends on a number of factors, such as the total price of the home, the area in which the borrower lives and the borrower’s credit score. The latter factor is the most important one, as it allows lenders to feel confident in the borrower’s ability to pay back the money in a timely manner.
Fixed vs. Variable
FHA rates fall into one of two possible interest rate categories: fixed and variable. FHA mortgage rates that are classified as fixed-rate mean the rate stays the same throughout the length of the loan. This is a benefit when the average interest rates are low. Borrowers can essentially lock in a low interest rate for the entire length of their loans, even if average interest rates rise. This helps the borrower avoid sudden increases in his or her monthly mortgage payment. It is important to note that even if the interest is fixed, the total amount of interest that a borrower owes depends on the length of the loan term.
FHA loan rates may also be classified as adjustable rate mortgages, or ARMs. The interest rates on these types of loans vary throughout the length of the loan term. Many ARMs have a fixed-interest period, which is known as a “hybrid loan.” With this type of loan, the interest rate is fixed at a certain percentage for the first few years. The most common FHA fixed interest rate periods are three-, five- and seven-year.
After the fixed-interest period ends, the interest rate adjusts each year. The new interest rate is then calculated by adding a margin to the index. A margin is typically a certain percentage higher than the adjustment index. The mortgage lender discloses the margin before the borrower signs any documents. Margins usually vary between lenders, which is why borrowers should consult various lenders before applying for any type of home loan.
The benefit of ARM FHA interest rates is that the initial interest rate is often lower than fixed-rate mortgages. However, it is important to note that even if the initial interest rate is low, it will likely increase after the fixed interest rate period ends. The rate may adjust as often as once per year.
FHA adjustable interest rates are given some protection from the U.S. Department of Housing and Urban Development (HUD), which controls large interest-rate swings. For example, it places caps on the adjustments to prevent lenders from changing the interest exponentially. The HUD places an annual cap on ARM loans, which restricts the amount that the interest rate can change (either up or down) in any given year. It also provides a life-of-the-loan cap, which limits the maximum interest rate a borrower can pay for as long as he or she has the mortgage.
This type of FHA mortgage rate may be best for borrowers who plan to sell or refinance within a short period of time. Most ARM rates have an initial fixed-rate period, during which the interest rate is considerably lower than fixed-rate mortgages. The draw of low payments in the near-term may be attractive to borrowers who do not plan to live in the house long enough for rates to increase.
Download our informative guide to read more about fixed and variable FHA interest rates.
FHA rates today also depend on credit. A credit score is a three-digit number that denotes a person’s creditworthiness. In other words, the number shows lenders how likely the borrower is to repay debt. When learning how to apply for an FHA loan, person’s credit score is determined by evaluating his or her credit report, which includes all debts and repayments made since he or she first acquired debt. The FHA loan rate secured by a borrower is heavily dependent on his or her score. The higher the number, the better the chances of securing a lower interest rate. Borrowers with low credit or derogatory marks in their records may still qualify for a loan, but will likely be charged a higher interest rate to compensate.
Lenders who offer FHA mortgage rates want to be sure that borrowers can afford to repay the loans, with all added interest and fees. Most lenders have a tiered system that gives borrowers a general sense of what their rates of interest will be. For example, if the lowest possible FHA interest rate provided by a lender is 3.5 percent, only borrowers with credit scores of 720 or higher may qualify for this rate. The next tier down may be reserved for borrowers with scores between 610 and 720. The lender has the right to set the interest rate, based on the borrower’s credit score, among other factors.
Aside from FHA loan rates, borrowers must prepare to pay origination fees, when reviewing the eligibility requirements for FHAs. These are fees charged by the lender for processing the application. Sometimes, these fees are called application fees, underwriting fees or processing fees. They cover the cost of:
- Gathering all documents.
- Requesting information from the IRS and employers.
- Analyzing all sources of the borrower’s income.
- Confirming the accuracy of all information provided.
- Verifying the application meets the qualifications for the FHA program.
Current FHA rates origination fees range anywhere from .5 to 2 percent of the total loan amount. Sometimes, borrowers can negotiate these fees with the lender. In turn, however, the lender may raise the interest rate slightly to compensate for the lower fees. Learn more about FHA loan rates by downloading our comprehensive guide.