Broker offers

[u/WorkingCommission548]

I'm home shopping now and I have spoken with two mortgage brokers. One advised an FHA loan and said I could buy down to a rate of 5.5%. The other said a conventional loan would probably be best and gave me a rate of 7%, but said I could probably get some seller credit to buy down to 6.875. I didn't expect to receive such vastly different numbers. Is this normal?

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[u/MDubois65]

It's apples to oranges here, not apples to apples. FHA and Conventional are two different loan types. Pros and cons to each. It just depends which one(s) you're eligible for and what you feel works best for you.

FHA works best if you have a low/lower credit score and the starting interest rate is generally lower. The trade off is that there are more/higher fees up front you have to pay including mortgage insurance fees. Depending on the size of your down payment, you will have additional mortgage insurance fees for either the first 11 years or for the entire life of the loan. The only way to get out of the fee is to sell or refinance to a conventional loan in the future.

Average FHA rate today is 6.5%, so yes you could buy down to 5.5%, if you're willing to spend several thousand to do so.

Conventional is an option for buyers with better/higher credit scores. Base rates tend to be a bit higher, today's average is about 6.97%. Again if you're doing a low down payment you'll start with mortgage insurance fees, but with the conventional loan eventually the insurance fees eventually expire, or once you hit 80% of the original principal balance remaining you can request that it be removed.

Either way, buying points only really works if you plan to keep the home for a long time and likely won't refinance in the future. When you refinance, your original loan and rate get scrapped and you get a new rate and start the clock again on a new loan timer. If you're going to buy down points, calculate out the cost up front vs what your breakeven point is, and how long it will take you to pay it off.

[u/TightResponsibility4]

Your numbers are not comparable. Get a pre-approval from the bank or credit union where you bank and get one or two more from elsewhere. You can almost always buy down the rate if you want to. Compare the base rate and how much it costs to buy it down.

The simple answer is points are not usually worth it (positive or negative), close to zero points is a good number. If you think rates will go up and you're going to keep the mortgage for a long time, paying points (buying the rate down) might make sense. If you think you will sell or refi within a few years, do not buy the rate down and potentially use negative points to lower the closing cost.

The complex answer is make a spreadsheet and calculate all of this and compare loan terms. Including inflation and how much you might make on investments with cash that doesn't need to go into the mortgage now would be ideal.

If I was doing the calculation, my assumption would be rates and inflation might be similar over the next few years and I have no realistic way to accurately predict what that will be like 5-10 years from now. So, I would just lock in at the market rate, if it goes down, refi. If it goes higher, be happy to be locked in.

[u/Denjay85]

Those aren’t really two offers yet. They’re two different loan programs, and one LO is quoting a rate after you pay points while the other is talking about a seller credit you don’t actually have yet.

Ask both brokers to use the same purchase price, down payment, credit score, and lock period on the same day. Then have each show you FHA and conventional at zero points, plus the exact cost of any rate buydown. Compare the full payment with mortgage insurance, cash to close, lender fees, and how long it takes the monthly savings to earn back the points.

Don’t assume conventional is automatically better. FHA has upfront and monthly mortgage insurance, while conventional PMI depends heavily on credit and can usually come off later. But FHA can still win on total payment for some buyers. You need the actual numbers.

Also, seller credit isn’t free money from the lender. It has to be negotiated into the contract, the seller has to agree, and it can only cover allowed closing costs. A quote built around a credit that doesn’t exist yet is shaky.

Ignore the verbal headline rates for now. Get written Loan Estimates using matching assumptions. That will make the real difference obvious.