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The evolution of FHA mortgage rates





Since its creation in 1934, the Federal Housing Administration's mission has been to provide access to mortgage loans for lower income, first-time buyers and minorities to encourage homeownership.

Before the FHA came along, most mortgage borrowers had short-term, balloon- or "bullet-payment" mortgages with down payments that averaged about 50 percent. While mortgage rates averaged 6 percent during most of the 1920s and 1930s, when the FHA came along with fixed interest rates that they set, competition grew, driving down average interest rates closer to 5 percent.

"The FHA started as a way to help families during the Great Depression by providing long-term loans with low down payment requirements," says Raphael Bostic, a professor with the Price School of Public Policy at the University of Southern California in Los Angeles and a former assistant secretary of the U.S. Dept. of Housing and Urban Development. "The early mortgage products that were available before the FHA were five-year loans with a balloon payment that required (at least) a 20 percent down payment. At the end of five years homeowners had to refinance or sell, which led to the massive loss of homes to foreclosure during the Depression."

Higher FHA mortgage rates

Today, most FHA borrowers have no idea that the FHA set their own interest rates until 1983, when the Housing and Rural Recovery Act mandated that FHA mortgage rates must be market-based.

"For the most part since 2000, FHA mortgage rates have been about 0.125 to 0.25 percent higher than conforming loans," says Keith Gumbinger, vice president of HSH.com. "FHA loans require more bureaucracy and special certification for lenders, so they cost more for lenders."

Year

Loan volume

Average FHA interest rate

Average conforming rate

2000

775,202

8.38 percent

8.26 percent

2003

1,128,108

6.07 percent

5.94 percent

2006

396,848

6.53 percent

6.50 percent

2009

1,731,343

5.33 percent

5.27 percent

2012

1,045,129

3.65 percent

3.85 percent

(Interest rates provided by HSH.com. FHA loan volume provided by HUD.)

"FHA loans vanished during the subprime loan boom (2004-2007) because people with a weak credit profile or a lack of cash could get subprime loans," says Rick Sharga, executive vice president of Auction.com in Irvine, Calif. "FHA loans made a comeback after the subprime market meltdown because it was almost the only place that borrowers could go. The FHA prevented a deeper fall off the cliff for the housing market. Without it, there would have been even more foreclosures."

Lower FHA mortgage rates

FHA mortgage rates began to be consistently lower than conforming loan rates by 0.125 to 0.25 percent beginning in 2010 in part because of the lack of penalties on FHA loans for having a lower credit score or a higher loan-to-value, says Gumbinger

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