Why are FHA and VA Mortgage Interest Rates Lower than Conventional Interest Rates? This is a question that comes up all the time and a great one. If you are considering refinancing and you currently have a conventional loan, which may or may not be backed by Fannie Mae or Freddie Mac, you may want to consider an FHA or VA loan.
Mortgage interest rates are typically lower for FHA and VA home loans because they are backed by Ginnie Mae, which is a government entity. Since Ginnie Mae is backed by the full faith of the United States government, they are considered risk-free investments. So any person or entity that invest in Ginnie Mae backed loans are guaranteed a return on their investment. Because they are a risk-free investment the interest rates are lower and the rate of return to the investor will also be less. Likewise, Fannie Mae and Freddie Mac are currently being controlled by the government as well, but only temporary, until they wind them down or privatize them again. Typically, mortgage interest rates are a bit higher on conventional loans because they are backed by Fannie Mae or Freddie Mac, which are private entities. Any person or company that invest in these entities risk losing money, so the rate of return will be higher than investing in Ginnie Mae. Also, the mortgage interest rate is a bit higher for the borrower.
The reason why you would want to choose a conventional loan over a FHA loan is based on a 30 year fixed mortgage regardless of how much money you put down, there is still a monthly mortgage insurance premium for at least 5 years and also an upfront mortgage insurance fee of 1.75% of the loan amount, that goes to the FHA. With a conventional loan, as long as there is a 20% down payment then there would be no monthly mortgage insurance or upfront mortgage insurance fee. In regards to a VA loan, which is for Veterans, there is no monthly mortgage insurance, just an upfront funding fee.
For those homeowners that are looking to refinance and owe more than 80% on their property, but less than 98% of the current value, you may want to look at an FHA or VA loan, it could benefit you.
If you currently have an FHA or VA loan then you would want to just refinance using whats called a streamline loan because most of the qualification requirements get tossed out.
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