FHA mortgages are attractive options for mortgage financing because they allow for high loan to value purchases and refinances. Very low interest rates can be obtained with FHA mortgages even if the borrowers do not have credit scores as high as what a conventional, non-government loan might require. With the reasonably easy qualifying criteria and low interest rates, they are a great option for many home owners and soon to be homeowners. With the easier qualifying criteria and the possibility of obtaining low interest rates, there also comes the tradeoff. FHA mortgage require an upfront mortgage insurance premium and monthly mortgage insurance premiums on most 30 year and 15 year mortgages.

The upfront mortgage insurance premium is equal to 1.75% on qualifying purchases and refinances on 30 year transactions. That means that you have to pay 1.75% of the loan amount in the form of an upfront premium (financed into the loan) to FHA. 1.75% on a $300,000 loan amount can be quite a large number that adds to your base loan amount.

Additionally, you will also have to pay monthly mortgage insurance premiums on average of 50 to 55 basis points (bps). For example, to calculate your monthly mortgage insurance premium on a $300,000 FHA loan, you would do the following calculation:

$300,000 x .0055 = $1650/yr

$1650 / 12 months = $137.50/mo.

So you would be paying $137.50 per month in mortgage insurance premiums on top of your normal principal, interest, taxes, and property insurance (PITI).

The upfront fee and monthly mortgage insurance premiums don’t necessarily mean that FHA is a bad route to take. It’s often the best and only route for some homeowners. Just be sure to compare the payments on a conventional mortgage and FHA loan if you qualify for both options. See which one makes the most sense before committing to such a large financial obligation.

Find the best FHA loans and lowest mortgage rates at BeatMyBroker.com