The most popular low-down-payment loans have been those insured by the Federal Housing Administration. Borrowers can make down payments as low as 3.5 percent; they pay an upfront fee (often rolled into the loan) and a monthly premium. An alternative is private mortgage insurance, or P.M.I., available to those who put down at least 5 percent.
As the name implies, the insurance is provided by a private company rather than the government. Premiums can be paid up front, each month, or in a mix. The amount of the premium drops as the size of the down payment rises. Use of these loans has fallen off sharply in recent years as the P.M.I. companies tightened standards and F.H.A. gained popularity.
Effective on April 18, F.H.A.’s annual premium on a 30-year loan rose to 1.1 or 1.15 percent of the loan value, up from 0.85 or 0.9 percent. (The higher rates are for down payments below 5 percent.) On a $400,000 loan with the minimum down payment, that’s $83 more per month.
The monthly fee is in addition to the up-front premium, equal to 1 percent of the loan value. Which loan to go with may depend on the answer to a question: “how long is it going to take to recoup that 1 percent up front?” said Matt Hackett, an underwriting manager at Equity Now, a direct mortgage lender based in New York.
In the first quarter, 17.7 percent of new loans were F.H.A., according to Inside Mortgage Finance, an industry data provider, while P.M.I. had a 5.4 percent market share. Applications for F.H.A. loans jumped 20 percent in the month preceding the price increase, then tumbled when it went into effect, according to the Mortgage Bankers Association.
In addition to lower minimum down-payment requirements, F.H.A. has laxer rules for credit scores and debt-to-income ratios. Right now, it also has lower interest rates, said Thatcher Zuse, the president of Sound Mortgage, a lender and broker in Guilford, Conn. “Almost as a rule, as the rates stand right now, the less equity you’re putting down, the better the F.H.A. deal becomes.”
Mr. Zuse ran the numbers for two buyers able to put 5 percent down. For a buyer with a 780 credit score, the cost difference between F.H.A. and P.M.I. was negligible, but a buyer with a 650 score could save about $200 a month on a $400,000 F.H.A. loan.
There are circumstances peculiar to the New York area that could push a borrower to F.H.A., said Robert Donovan, a Bank of America senior vice president and regional sales executive. For one thing, the region has a high concentration of two- to four-unit homes, popular with buyers who want to live in one apartment while renting out another. Loans in such cases are treated much more liberally by F.H.A., he said.
The same goes for new-construction condominiums of any size: until more than half a project is sold, conventional loans may not be an option. F.H.A.-backed loans are available even if as little as 30 percent of the project is sold, Mr. Donovan said.
In the broadest terms, for someone with no special circumstances, great credit and a more-than-minimum down payment — say, 10 or 15 percent — P.M.I. may turn out to be the better deal. Someone with weaker credit or less cash may find F.H.A. works better.
To generalize, “if you qualify for P.M.I.,” Mr. Hackett said, “you should usually choose the P.M.I., because it is going to be less.”
Circumstances vary, though, so ask any lender to produce a written comparison, said Michael Moskowitz, the president of Equity Now, “just to keep the lender honest.”
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