Bill McCord's Blog

Interest Rates (Photo credit: 401(K) 2013)

FHA loans with a 3.5% minimum down payment are often the only choice for 1st time buyers.
They get a lot of bad publicity from uninformed sources who compare them wrongly to conforming loans needing much higher down payments.

The reality is that the FHA loan is neither designed, nor sensible, for high down payment buyers.

However it does have one very powerful advantage over the traditional conforming loans; FHA LOANS ARE ASSUMABLE at the same interest rate as they started at.
In future years this may be a very valuable feature when selling the property.

First let’s understand that 1st time buyers in California typically sell that 1st house after approx 5 years.

Now let’s consider what level mortgage interest rates will be at that time, and compare with todays. We will assume a $400,000 FHA mortgage

CURRENT (historically low) 3.5% = $1,796/ month.

FUTURE (5 years)(20 year average) 6.0% =$2,398/month.

SAVING = $602/Month.
Now in 5 years time you are selling your home and have a smart buyer trying to decide which of 2 similar houses is the best deal might they well prefer the one where you can:
1. Buy and take over the existing mortgage which is $602/month cheaper for all time
OR
2. Go through all the hassle of getting a much more expensive mortgage for as long as you own it.
Assuming they sell after a typical 5 year period there is a difference of $36,120!!!.

MAYBE IT’s WORTH FINDING OUT WHICH IS THE BEST MORTGAGE FOR YOU, Not for the loan Agent who did not take the time to explain ALL your options, and the long term implications of each one.