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The Complete Guide to FHA Loan Rates

Updated November 8, 2019
5 min read
FHA loan rates

FHA loans are mortgages insured by the U.S Government’s Federal Housing Administration. They are designed for low- to moderate-income earners and often come with less stringent credit and down payment requirements than other loan products.

FHA Loan Rates Index

How FHA Loan Rates are Determined

FHA loan rates vary from lender to lender, with each taking into account numerous economic and market factors when setting their rates.

Generally, a lender will consider things like:

  • The overall state of the economy
  • Investor demand and stock market performance
  • Federal Reserve policies and expected rate hikes
  • The 10-year Treasury bond yield

To determine the specific rate they will offer a borrower (or set of borrowers), lenders consider data specific to that household. This can include credit score, loan-to-value ratio, total amount borrowed, type of loan and more.

Fixed vs. ARM Rates

There are two types of FHA mortgage loans: Fixed-rate and adjustable-rate (also called an ARM or Adjustable Rate Mortgage). Fixed-rate mortgages come with a set interest rate that carries through the entirety of the loan term (15 years, 30 years, etc.) An adjustable-rate mortgage has an interest rate that fluctuates over time. It may be fixed for an initial 3, 5, 7 or even 10 years, but after that period is up, the interest rate can increase. This could cause the homeowner’s monthly mortgage payment to increase as well.

Comparing FHA Fixed vs. ARM Rates

Fixed-rate loans typically have higher interest rates than ARMs, because they provide more protection for the homeowner over time. Adjustable-rate ones, which offer the lender the ability to increase the rate down the line, come with a lower up-front rate as an incentive.

Which is Best?

A fixed-rate mortgage is generally going to offer the most consistency for a buyer, meaning their payment won’t fluctuate much over time. This makes it easy to budget and ensure healthy cash flow over the course of the loan. These loans can come with higher upfront and monthly costs.

Adjustable-rate loans can be best for short-term buyers. Those who are comfortable refinancing into a fixed-rate loan before their rate starts to fluctuate may also benefit from an adjustable-rate mortgage. Still, ARM borrowers should keep in mind the risks of this approach. Mortgage rates change regularly, so the fixed rate they’re offered in 5 years may be higher than the one they could secure today.

Be sure to talk with a reputable lender about the pros and cons for your specific scenario.

FHA Loan Rate Averages

Buyers can look to resources like the Ellie Mae Origination Insight Report to see recent trends in rates. Generally, average rates on FHA loans are comparable to average conventional mortgage rates.

Keep in mind that rates also vary from borrower to borrower. Talk with a lender for an accurate rate estimate.

What is APR?

There are two different rates that come with a mortgage loan: the interest rate and the APR, or Annual Percentage Rate. The interest rate simply reflects the cost you pay to borrow the money from your lender. The APR, on the other hand, includes additional fees and charges directly associated with the loan.

Your points, broker fees, and other charges are factored into the APR, giving you a more comprehensive view of what your mortgage costs you across a year. When applying for mortgage quotes, you’ll notice that APRs are typically higher than your offered interest rates.

Discount Points and Your FHA Loan Rate

Paying discount points is a way to lower your interest rate (and subsequently your monthly mortgage payments). It’s essentially a way of pre-paying your loan’s interest up front. The cost of points varies by loan amount, with one point equaling 1 percent of the loan’s initial balance.

Paying points can save buyers significantly on their interest, but only if they stay in the home long enough. Short-term buyers generally do not save — or may even lose money — by paying points up front. To determine if paying points is smart in your case, try calculating the break-even point: [Points Cost] / [Monthly Payment Savings] = [Months Until Break-even]. If you plan to stay in the home at least that long, then paying points up front can be a money-saving move.

When to Lock in Your Rate

Since mortgage rates fluctuate often, it’s not uncommon for the rate you’re quoted to change by the time you close on the home. A rate lock offers a way to prevent this. Rate locks essentially freeze the interest rate you’ve been offered for a set period of time, giving you X amount of time in order find a home and close on the property.

Rate lock-in offers vary by lender, but they generally come in 30-, 45-, 60- or even 90-day periods. This number represents how long your rate is locked in and guaranteed for. Some lenders offer free rate locks, while others charge a fee. Fees are generally higher the longer the rate lock period lasts.

It’s usually best not to lock your rate until you’ve found a property (and, ideally, your offer has been accepted). If you lock too early and are unable to close on your home, you may have to pay expensive extension fees or, worse, re-apply for the loan altogether.

Talk with your lender about your options in more detail.

FHA Refinance Rates

FHA refinance rates vary by borrower and lender, just as purchase loans do. However, as mortgage rates are still historically low compared to a decade ago, many current homeowners will find that current rates are below the rate on their existing loan, which may make it a smart financial decision to refinance.

FHA mortgage holders may also be able to remove mortgage insurance when refinancing their loans. This can lower their monthly payment even further. However refinancing may result in higher finance charges over the life of the loan.

A lender who knows FHA refinance options can help assess your specific situation and explain your options in detail.

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