MORTGAGE

Which Mortgage Type Offers the Best Rates – FHA, VA, or Conventional?

What you'll learn:FHA vs. VA vs. conventional: Who is the winner when it comes to the lowest rates?

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September 16, 2022

Which Mortgage Type Offers the Best Rates – FHA, VA, or Conventional?

FHA vs. VA vs. Conventional: Who is the winner when it comes to the lowest mortgage rates? The answer is … there’s not just one right answer. It depends on what the other inputs are, not the least of which are your unique needs and goals. Let’s break it down so you can choose your winner.

Comparing loan types

Before discussing rates, it’s helpful to outline some of the key differences between Federal Housing Administration (FHA) loans, Veterans Affairs (VA) loans, and Conventional mortgage loans. Notice how their distinct features can make it hard to make an apples-to-apples comparison.

	FHA Loans	VA Loans	Conventional Loans
Government-backed	Yes – by the Federal Housing Administration (FHA)	Yes – by the U.S. Department of Veterans Affairs (VA)	No
Minimum down payment	3.5%	0%	3%; 20% is standard
Minimum credit score	As low as 500; lenders typically require 620	None; lenders typically require 580	620
Property restrictions	Primary residence requirement	Primary residence requirement	No restrictions for second homes or investment properties
Other costs	Mortgage insurance premium (MIP); closing costs	VA funding fee; closing costs	Private mortgage insurance (PMI) if under 20% equity; closing costs
Usually best if you are…	Unable to meet the requirements of a conventional loan	An eligible veteran, servicemember, or military spouse	In a favorable financial position

How are mortgage rates determined?

Now let’s talk interest rates. Here are the factors that determine mortgage rates.

Down payment size

A mortgage down payment is the cash you pay upfront toward a property. The remainder is financed into a home loan. A standard for conventional loans is 20 percent, but it’s possible to pay as little as 3 percent down (just know it will require mortgage insurance).

Top takeaway: A higher down payment usually secures a lower rate.

Credit score

Your credit score is a number based on the information in your credit history. The calculation takes into account several factors including how much debt you have, the type of debt, and your repayment history.

Top takeaway: The higher your score, the more responsible a lender sees you at handling debt – often translating into a lower interest rate.

Debt-to-income ratio (DTI)

DTI is a ratio that helps lenders better understand your ability to afford a home based on how much of your income is already used for paying off debt. It’s calculated by dividing your debt payments by your pre-tax income.

Top takeaway: Often, the lower the DTI, the lower the interest rate.

Loan size, term, and type

Mortgages come in many shapes and sizes. A 15-year fixed rate conventional loan for $150,000 is very different from a 5/1 adjustable-rate FHA loan. Rates can increase or decrease with different loan amounts, term lengths, and types (whether they are conventional, jumbo, or government-backed).

Top takeaway: All these variables influence each other. Your lender can suggest an optimal approach for you.

Property location and type

Rates can vary based on geographic area and whether the property is a primary residence, an investment or rental property, or a piece of land. States have different laws that influence interest rates, and a lender may also take into consideration how many foreclosures are in the area.

Top takeaway: The old real estate adage applies: location, location, location. It can pay to research the area where you plan to buy before shopping around for a loan. And be sure your lender knows upfront how you intend to use the property.

Mortgage points

You may choose to buy down your rate through points. This means you’ll pay a one-time, upfront fee in exchange for a lower interest rate. It can take years to pay off the initial expense, so make sure to run the numbers ahead of time to ensure it’s worth it.

Top takeaway: A higher interest rate doesn’t always mean you pay more in the end.

Economic conditions

Many forces affect rates that are outside of your or your lender’s control. Rates will rise and fall over time depending on inflation, the housing market, the state of our economy, and other external factors.

Top takeaway: While it may make sense to wait out a period of rising interest rates if you can, there’s no such thing as a perfect interest rate. Smart money says work on the factors you can control, like your credit score, DTI, and other financials.

Lender

It’s recommended to shop around for a mortgage because banks, credit unions, and online lenders set their own rates. They can be higher or lower based on the financial institution’s business model. Credit unions usually offer lower rates because they are nonprofits and enjoy significant tax advantages.

Top takeaway: When choosing a lender, think beyond the lowest interest rate. Also think about the relationship you want to have with them. (We make getting to know us easy at our Mortgage Center.)

Final takeaway: Loan type is just one of the many things lenders take into consideration when quoting rates. Truth is, each of the loans may offer the lowest rate at any given time because of the differing factors.

One more time: Interest rate isn’t everything

Don’t let the shine of the lowest rate blind you from looking at all of your options. You can actually pay less for a loan overall, even with a slightly higher rate, if other costs are lower.

For example: A veteran may find that a VA loan offers the lowest 30-year fixed interest rate, but the loan comes with a sizable funding fee. He has a 20 percent down payment and can avoid PMI, so a conventional loan with a slightly higher rate is actually the better option to pay less in the long run.

What does all this mean for you?

There isn’t a perfect formula for finding the best rate. It requires knowing your situation, understanding different loan types, and being prepared to crunch the numbers when you shop around for quotes.

For more information about PenFed Mortgages:

PenFed Mortgage:

800-970-7766

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Disclosures

¹Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on 30_YEAR_FIXED_CONFORMING_FHA__POINT discount point, which equals percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, conforming, fixed-rate loan. Loan amount of $400,000; loan-to-value ratio of 96.5%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.

^*Prime Rate is RV Prime Rate % as of Boat Prime Effective Date . The APR for this Home Equity Line of Credit (HELOC) is based on prime plus a margin and can change monthly. Fixed Rate Advances will be amortized over the Fixed Rate Advance Term, with the payment consisting of principal and interest. Your Annual Percentage Rate for a Fixed Rate Advance will be calculated by adding your Prime Rate, your Margin, and the Additional Fixed Rate Lock-In Margin. Your Annual Percentage Rate for a Fixed Rate Advance shall not exceed 18% and shall be equal to or greater than 1020 ELOC OO CLTV 70 Rate % for primary residences and second homes.

Annual Fee: Notwithstanding the foregoing, an annual fee of $99 will be assessed on each account anniversary.
Home equity lines of credit (HELOC) are variable rate loans and the interest rate is subject to increase after consummation of the loan on monthly basis. Closing costs range between $500 and $8,500 for credit lines of $500,000. Contact a representative for additional details.

Appraisals: PenFed will attempt to establish value via an independent method. If that method is unsuccessful, or the value is not sufficient for the amount requested, an appraisal will be required regardless of CLTV. An appraisal is always required in the following circumstances:

For all loans with a loan amount greater than $400,000.

If an appraisal is required, it must be ordered by PenFed. You will be contacted for authorization and payment prior to ordering. Appraisal fees average $550 to $850 (some run higher).

Closing Cost Credit: PenFed will pay most closing costs associated with a home equity line of credit (HELOC), which includes credit report, flood certification, settlement/closing, property ownership and encumbrances search, recording, property search, and quick close. Member is responsible for any city, county, and/or state taxes if the subject property is located in FL, LA, MD, MN, NY, TN, or VA. If an appraisal is required, the member, who is responsible for the fee whether or not the loan closes, will pay the cost.

Interest may be tax deductible, consult a tax advisor for further information regarding the tax deductibility of interest and charges.

Fixed Rate Advance Lock-In You may lock in an Annual Percentage Rate for Advances during the Advance Period. During your Advance Period, you may choose to have three separate Fixed Rate Advances locked in at any one time, with a maximum of two new Fixed Rate Advances per calendar year. Each Fixed Rate Advance must equal or exceed Ten Thousand Dollars ($10,000.00) and you may not request a Fixed Rate Advance that would cause the amount you owe to exceed your Credit Limit. The only term option for your Fixed Rate Advance is 240 months (“Fixed Rate Advance Term”). However, the term of your Fixed Rate Advance cannot exceed your Repayment Period.

Fixed Rate Advances will be amortized over the Fixed Rate Advance Term with the payment consisting of principal and interest. Your Annual Percentage Rate for a Fixed Rate Advance will be calculated by adding your Prime Rate, your Margin and the Additional Fixed Rate Lock-In Margin. Your Annual Percentage Rate for a Fixed Rate Advance shall not exceed 18% and shall be equal to or greater than 1020 ELOC OO CLTV 70 Rate % for primary residences and second homes and 4.75% for investment properties.

Property Insurance: Property insurance is required.

Multiple PenFed Loans: Multiple PenFed Equity loans and HELOCs are available as long as the member and collateral qualify (except Texas). For Equity loans and HELOCs the total indebtedness cannot exceed $500,000 for all PenFed Equity and HELOCs combined.

PenFed does not lend on:

Mobile homes
Co-ops or time-shares
Properties that are currently listed on the market for sale
Commercial property or property used for commercial purposes, even if a residence is part of the property
Undeveloped property (land only)
Properties with more than 4 units

Properties that are currently under major construction/renovations: Property must be fully livable, with no safety issues. (Examples: no missing rails from stairs/decks, no open walls with wires showing, missing kitchen appliances/counters, missing bath fixtures or unfinished pool).

Additional limitations may apply

Home Equity Line of Credit:

This Account has a Draw Period of 10 years, followed by a repayment period of 20 years.
If only minimum payments are made during the draw period, the loan balance will not decrease.
In Texas, the maximum CLTV available is 80% on owner occupied properties. Additional restrictions apply in Texas, so please ask a representative for details.
In all other states, the maximum CLTV is 85% on owner occupied properties and second homes. Additional restrictions or requirements may apply based on application characteristics.
Property type of Condo has a maximum CLTV of 80%.
The maximum CLTV available is dependent on credit qualification.
Rates vary depending on owner occupancy and CLTV and other loan criteria.

Minimum Loan Amount Requirements in all States:

For an owner occupied property or second home the minimum loan amount is $25,000 and the maximum amount is $500,000 with a CLTV of 85% or less of the fair market value.

Other terms and conditions apply; call 844-918-4307 to speak with a representative for details. All rates and offers are subject to change without notice. To receive advertised product, you must become a member of PenFed.

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Which Mortgage Type Offers the Best Rates – FHA, VA, or Conventional?

Which Mortgage Type Offers the Best Rates – FHA, VA, or Conventional?

Comparing loan types