How do FHA loans compare to subprime loans?

With so much talk in the media of the "subprime crisis" I thought I'd share some information on the new subprime alternative (which is really an OLD alternative) - FHA loans.

Subprime loans are loans designed for homebuyers who don't have a credit history or can't qualify for a regular or prime loan. Lenders charge a much higher interest rate on subprime loans because the risk that a homebuyer may not make their payments is higher. Because FHA insures the lender against this risk, the interest rates on FHA loans are generally among the lowest in the market. Most subprime loans carry interest rates at least 3 percentage points higher than FHA. On a $100,000 mortgage, this means the monthly payment for a subprime loan would be over $200 a month higher than on an FHA loan!

Most subprime loans are also ARMs, where the interest rate can change a lot and greatly increase your monthly payments. Most FHA loans are fixed rate loans where the mortgage payment always stays the same. If you have an FHA ARM loan, the rate can't go up by more than one or two points in a year. The fees that lenders charge their borrowers for processing a subprime loan are also generally higher than on an FHA loan.

Finally, most subprime loans carry a heavy prepayment penalty that you must pay if you want to refinance your loan to a lower interest rate. These penalties can cost you hundreds or even thousands of dollars. There is never a prepayment penalty on an FHA loan. You can refinance at any time and not worry about paying any penalties.

Unfortunately, because they don't know these facts, many home buyers who could qualify to buy a home with a fixed FHA rate only apply for subprime loans. Don't make that mistake! Check out an FHA loan before settling for a subprime loan.

Contact me if you have any questions about FHA loans, or any other loan scenario.

Jeremy