Q: When is a 3.75% FHA loan a better deal than a 3.5% FHA loan?
A: When the 3.75% loan is (a lot) cheaper to get.
Consumers shopping for a mortgage tend to focus only on the face rate of the mortgage.
That’s a mistake, because the total cost of the loan breaks down into two components: 1) the loan interest rate; 2) the fees to get that loan.
So, there are plenty of instances where a mortgage carrying a nominally higher interest rate — like the FHA example cited above — is actually a better deal because it has dramatically lower fees associated with it.
Thanks to Edina Mortgage’s Keith O’Brien for the above insight.
P.S.: For precisely this reason, I advise prospective borrowers to scrutinize the federally-mandated Truth-in-Lending (“TIL”) disclosure, which shows both the loan’s face interest rate, and the rate after all the loan fees are included (called the A.P.R., or “Annual Percentage Rate”).
In the example above, the 3.5% loan might have an A.P.R. of 4.1%, while the A.P.R. on the 3.75% loan would be 3.9% (or thereabouts).