fbpx Skip to main content

This post may contain affiliate links which may compensate us based on your interaction. Please read the disclosures for more information.

Getting a mortgage may be more costly than you expect. 

Image source: Getty Images

If you are thinking about getting a mortgage, you need to research different types of loans carefully. There are many different choices when it comes to home loans, and some are better than others — especially for specific types of buyers such as those who are well qualified or those who may not have perfect financial credentials.

When you look into your loan options, you should look at all the details — including both the mortgage interest rate as well as any added fees you may have to pay. Specifically, finance expert Dave Ramsey warns about sneaky added expenses associated with one common type of loan.

This kind of mortgage could cost more than you think

The type of loan Ramsey warns about is frequently used by buyers with no credit, low credit scores, a low down payment, or other financial issues that could prevent them from getting the cheapest loans from the broadest range of lenders.

It’s called an FHA loan, because it is guaranteed or backed by the Federal Housing Administration. Because the government guarantees these loans, they are less risky for lenders, so the qualifying criteria is much less strict than with many other mortgages that don’t have government backing. In fact, you can qualify with as little as 3.5% down and with a much lower credit score than you’d need for most other kinds of mortgages.

Although the ease of approval could be very attractive, Ramsey warns that you could find yourself facing lots of extra costs with FHA loans.

“FHA loans seem great at first, but they have some sneaky fees,” Ramsey explained. “They require you to pay a 1.75% mortgage insurance premium (MIP) up front and an annual premium between 0.45% and 1.05% for the life of the loan. So, an FHA loan can cost you thousands of extra dollars that don’t go toward paying off your mortgage.”

Should you listen to Ramsey and avoid FHA loans?

There is absolutely no doubt that Ramsey is right about the big added costs associated with FHA loans. They can be a far more expensive option in terms of fees compared with conventional mortgages (those not backed by the government).

In fact, while you do have to pay private mortgage insurance (PMI) with a conventional loan if you make a small down payment, this typically doesn’t come with an upfront fee — you just make a payment toward it with each month’s payment. And you can eventually get rid of PMI once your loan balance falls to a certain amount relative to your home’s value — meaning you aren’t stuck with it for as long.

Because of these added FHA loan expenses, if you have reasonable credit, then you should try to get a loan from a conventional lender and steer clear of FHA mortgages. But the important thing to remember is that these loans are meant for people who might not otherwise be able to get affordable mortgages.

If you are ready for homeownership, have plenty of cash saved, can easily cover your mortgage, and you want to buy a property right away, then getting an FHA loan is likely going to be a better choice than getting a subprime loan if you couldn’t qualify for a standard mortgage.

Get yourself in the best position possible before getting a mortgage

Now, you should seriously think about waiting a little to improve your credentials and get a better loan elsewhere — but if that would take longer than you’re comfortable with or you think property values will go up in the meantime and you’ll lose out on that appreciation, then an FHA loan isn’t a terrible option. And if you improve your finances later and can qualify for a better, cheaper mortgage, you can always refinance your home loan.

So you can listen to Ramsey’s warning about fees — with the caveat that this doesn’t always mean an FHA loan should be off the table. It all depends on your situation, so you just need to carefully consider your options to make the best choice for you.

Our picks for the best credit cards

Our experts vetted the most popular offers to land on the select picks that are worthy of a spot in your wallet. These best-in-class cards pack in rich perks, such as big sign-up bonuses, long 0% intro APR offers, and robust rewards. Get started today with our recommended credit cards.

We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

 Read More 

Leave a Reply