My wife Carrie is fond of telling our children “comparison is the thief of joy”. Well, fond may not be the right word, but I do know she says it a lot. (Probably because one of our kids is a teenage boy, and listening seems to be among the skills he has yet to master.)
The Consumer Financial Protection Bureau (CFPB), apparently, disagrees with her. Concerned over the lack of comparison-shopping, they have announced a new online tool to help borrowers shop interest rates.
Right after the CFPB’s announcement, MBA President and CEO David Stevens pointed out in a HousingWire article that the CFPB’s tool was missing many of the disclosures lenders are required to provide. Simply put, in his opinion, if lenders used this same tool they would be in trouble with the CFPB for misleading borrowers.
You can read the article and judge for yourself who is right.
In a way, I believe they both may be correct. While I am not a fan of the tool itself, I agree with the CFPB that perhaps more borrowers should compare mortgages before buying what for most of us is the biggest investment we will ever make. However, such a comparison is not as simple as “what’s the interest rate?” or even, “what’s the monthly payment?”
There are many factors a borrower should take into consideration. After all, a mortgage is not a one-day event.
This leads us to recent changes that make homeownership more attainable for more first-time homebuyers. Last month Fannie Mae and Freddie Mac announced they were bringing back 3% down payment guidelines. And earlier this month, the FHA announced that its annual premiums would be reduced by .50%.
Both moves should help our would-be first-time homebuyers, but which one makes the most sense for which borrower? Let’s compare. (Sorry, Carrie.)
Consider. Compare. Conclude.
Let’s say we have a:
- $200,000 home purchase
- Minimum down payment (3.5% for FHA and 3% for conventional)
- 720 credit score
- 30-year fixed rate (3.75% for FHA and 4.0% for conventional)
If we run these two scenarios we see a monthly payment (P&I + mortgage insurance) of $1,045 for FHA and $1,104 for conventional with private mortgage insurance. That’s a difference of $59 a month.
So there you have it — FHA provided a lower interest rate and a lower monthly payment. Done, right? Well, maybe. Maybe not. Again, a mortgage is not a one-day event.
The FHA borrower in our example had to:
- Put down 0.5% more ($1,000 in our example)
- Pay an upfront premium of 1.75% ($3,378 in our example)
- It is likely that the upfront premium was financed into the loan. Regardless, it is still money the borrower will need to pay either upfront, or over the life of the loan, resulting in less equity.
In our example, the FHA borrower has an extra $4,378 in down payment and upfront mortgage insurance compared to the conventional homebuyer. At a savings of $59 a month, it will take the homebuyer about 75 months, or nearly six years, to recoup that cost.
If we were to assume a 3% annual appreciation rate, the conventional homebuyer would be able to request cancelling the mortgage insurance in just over 5 years. Once the mortgage insurance is cancelled, the borrower’s monthly payment drops to $926 — over $100 less than the monthly payment on the FHA loan.
So conventional is better, right? I didn’t say that either.
For some borrowers, the $59 per month savings at the start will sway them toward FHA.For others the increased equity, smaller down payment and ability to cancel the mortgage insurance will have them opt for conventional with private mortgage insurance.
As mortgage professionals, part of our job is helping homebuyers understand all their options and the impact of their decisions, both short- and long-term. And that means helping them truly compare their buying options, beyond just a simple difference in interest rates.Tags: CFPB, FHA, Mortgage Education, Mortgage Industry, Mortgage Insurance, Top Content