FHA Rates — and Especially Fees(!) — Soar Higher
Prospective borrowers obviously care about the face rate on their mortgage, but what they should really care about is what’s called the “A.P.R.,” or Annual Percentage Rate.
It’s the latter number that captures the various fees that the lender is charging, and reflects the true cost of the loan.
Interest Rate vs. A.P.R.
So, I tell my Buyer clients to be on the lookout for loans that offer a (too) attractive interest rate, but more than offset that with exorbitant fees.
With 30-year fixed rates around 4.5% now, what’s an acceptable A.P.R.?
Somewhere between 4.65% and 4.8%.
Yawning Gap
Now contrast that with the prevailing rates on a 30-year FHA (government) loan earlier this week: 4.25% interest and a whopping 6.003% APR, respectively.
That reflects a stunning run-up from just two months ago, when the corresponding FHA numbers were 2.75% and 3.75%, respectively. See, “FHA fees: Up, Up and Away.”
That yawning — and growing — gap is (or should be) a deal breaker for all but the most cash-strapped Buyers, who can do much better with what’s called a conventional loan.
Loan of Last Resort?
That is, assuming they qualify: FHA loans have traditionally appealed to first-time Buyers with weaker credit and little money available for a downpayment.
In the government’s defense, ballooning FHA fees can be at least partially explained as an attempt to pass on the costs associated with lending to a weaker (and riskier) pool of borrowers.
Not that government-backed mortgages have ever stuck taxpayers with staggering losses (sadly, that last one’s a BIG whopper, as anyone familiar with Fannie Mae and Freddie Mac’s recent history can attest).
