Picture it: you’re picking between two new shiny objects. One has higher up-front costs and higher monthly payments, while the other has no up-front costs, and lower monthly payments. All other things being equal, after weighing the pros and cons, you choose the higher priced option! That’s crazy talk, you say! No one would ever do that!
This metaphor is a great parallel for the two most popular home loans: conventional and FHA. Conventional loans are generally cheaper than FHA loans. They require no up-front mortgage insurance premiums, and have low down payments, down to as little as 3 percent of the purchase price. FHA loans, in contrast, are more expensive to get. They require an up-front mortgage insurance fee of 0.175% on all loans over 80 percent, and have monthly mortgage insurance that stays with you for the life of the loan. Yet, in recent years, FHA popularity has surged. (To give you an idea, they went from a 3 percent market share to almost 33 percent.) Here’s why, even though FHA loans are more expensive, you still might want one. [Read more…]