On the surface FHA has a cheaper interest rate, but the APR is much higher. Check out Wells Fargo’s rate listings to see what I am talking about: https://www.wellsfargo.com/mortgage/rates/
Do not look at the interest rate but focus on the APR. Wells explains it this way “The APR includes the interest rate, fees, points, and mortgage insurance, and is therefore a more complete measure of a loan’s cost than the interest rate alone.”
FHA is notorious for sneaking in points, fees and very high rates of mortgage insurance which dramatically increases the long-term costs of the loan. If you can qualify for a standard fixed rate, then I would recommend this route.
FHA is probably your best option IF you have scores in the 600’s and limited down payment capacity. If you’ve got 10%+ down and scores in 700-s, you’ll save money by going with a conventional loan.
Think about it this way… FHA loan at 4% yields a P&I payment of 500$ Conv. Loan at 4.5% yields a P&I payment of 550$ BUT the FHA loan will likely have PMI premiums of 80-100$ per month and it will not fall off in most cases. The Conventional (with a 20% downpayment wont have PMI) with a smaller downpayment it will have PMI but it will be far less (lets pretend its 40$) and it WILL fall off at 78% equity though you can request it to fall off at 80%. Youll end up paying back much less with the Conventional loan. FHA – 600$ per month for life of loan. Conv.– 590$ per month for a few years then 550 after that. Make sense? These are arbitrary numbers just to make a point, but it nearly always works out better to choose a Conventional loan. Unless your a Vet, then you can get a lower rate with no PMI through a VA loan. Theyre the best in my humble opinion.