How Are FHA Mortgage Rates Calculated?
Federal Housing Authority (FHA) mortgages are designed to give first-time home buyers more affordable rates. They also permit lower-income families the chance to purchase a home of their own by allowing them to borrow even though many traditional mortgage lenders would consider them to be a greater risk. These mortgages are insured by government-backed companies in case they are defaulted upon. Depending on the kind of mortgage, the rates will be calculated and a monthly repayment amount be set for the mortgage.
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Kinds of FHA Mortgages
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FHA approved lenders carry fixed-rate mortgages, adjustable-rate mortgages (ARMs), a combination of fixed for a particular term and then adjustable for the rest of the mortgage and interest-only, paying only the interest for the first few years and then starting to pay down the principal as well as the interest. In some cases, the homeowner may be eligible for a Home Equity Line of Credit (HELOC) or Home Refinancing rate to take advantage of changes in interests rates since the mortgage was first taken out.
Calculation of FHA Mortgage Rates
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The FHA mortgage rate is linked to the mortgage rates of the U.S. Treasury (the prime mortgage rate) at the time that the mortgage is being applied for. There are usually set margins for the mortgage rate, for instance, 2 to 3 percent above the prime mortgage rate. For a fixed rate, the amount would remain at that percentage of interest for the lifetime of the loan, which can be up to 30 years.
For an adjustable-rate mortgage (ARM), there would be a margin and also a cap, a maximum interest rate payable. Some mortgages may offer introductory rates as well. The 3/1 and 5/1 mortgages available through FHA-approved lenders will be fixed-rate for three or five years respectively and then become an ARM. -
FHA Mortgage Rates Based on Credit Score and Loan to Value Ratio
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The mortgage rate will be calculated depending on how credit-worthy the borrower is, their income and their Loan to Value Ratio (LTV). The LTV calculates how much of a financial risk the borrower is determined to be. It is calculated as the mortgage amount to be borrowed divided by the appraised value of the property, which is to be purchased. An LTV of more than 75 percent would be considered high risk. Under FHA mortgages, even borrowers with an LTV of 95 percent are eligible, but they will most likely need to pay higher interest rates.
Other Factors Used to Calculate an FHA Mortgage Rate
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If you are a veteran, you can get preferential rates under the FHA mortgage program.
Amount Permitted to be Borrowed Under an FHA Mortgage
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FHA mortgage terms vary from state to state. Higher borrowing limits are permitted in high-value housing states. The limits are adjusted every year by the Federal Home Loan Mortgage Corporation (Freddie Mac).
FHA Mortgage Rate Accountability
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The Federal Housing Authority is a division of the U.S. Department of Housing and Urban Development (HUD). All FHA mortgage rates are calculated in line with treasury rates and are guaranteed by the federal government. FHA mortgages can only be issued through approved lenders.
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