You Don’t Pay Back a Mortgage Interest Rate, You Pay Back a Mortgage Payment.

OK, so you’ve heard it on the radio spot.

What does that mean?

It means, we’re making sure the listening market understands the difference between interest rate and effective interest rate. Let’s look at a basic payment breakdown on a 30 Year FHA vs 30 Year Conventional, 3.5% down payment on a $200,000 loan amount. In this scenario, a borrower who has a FHA loan at 3.375% would benefit by refinancing to a higher interest rate on a different program.

FHA Conventional
Rate 3.375% 3.625%
P&I $868.18 $880.18
Taxes and Insurance $275.00 $275.00
Mortgage Insurance(MI) $135.49** $101.33*
Total $1,278.67 $1,256.51
When paid down to 78% $1,278.67 $1,155.18
Total Payback, Life of loan $341,295 $316,864
APR 4.512% 4.283%

So Why?

This is the truth of the statement, “You Don’t Pay Back a Mortgage Interest Rate, You Pay Back a Mortgage Payment.”. FHA carries an upfront premium of 1.75% of the loan amount, effectively making your loan amount higher by 1.75%. To that, FHA also adds a monthly Mortgage Insurance Premium which never goes away. By comparison, the conventional loan cancels when the loan is paid down to 78% of the purchase price where FHA monthly mortgage insurance never cancels in this type of transaction.
In this post meltdown mortgage universe, 99% of the mortgages out there are good loans. Fixed programs, stunningly low rates. However, knowing more than just interest rates really maximizes your benefit.

*payment cancels when balance is paid down to 78% of purchase price.
**payment never cancels