Homebuyers

The Surprise FHA Loan Advantage: Lower Mortgage Interest Rates

If you’re buying a home, you may not want to overlook an FHA loan.

It’s a popular choice, especially among first-time buyers, thanks to its lower credit score and down payment requirements. However, many buyers don’t realize that these Federal Housing Administration (FHA) loans typically offer lower mortgage interest rates than many other types of home loans.

Depending on the rate you lock in and the terms of your loan, those lower interest charges could save you thousands of dollars over time. Buyers do have to understand, though, they will be required to pay mortgage insurance premiums with an FHA loan.

“For a buyer with a lower credit score, the FHA rate plus mortgage insurance can still come out cheaper than what they’d be offered on [another] loan,” said Adriana Montes, the real estate broker at Florida Dreams Realty Group in Miami.

Let’s take a closer look at how FHA loans work and why they might be a more affordable homebuying solution, depending on your situation. 

Why mortgage rates are lower for FHA loans

Mortgage rates for FHA loans are generally lower than other types of home loans because they are backed by the federal government. This means the government guarantees a portion of the loan if a borrower stops making payments on their mortgage.

Since lenders take on less risk, they’re able to offer lower interest rates on FHA loans.

Conventional loans, on the other hand, aren’t backed by the government. Lenders must assume more risk.

As a result, they often charge higher interest rates, especially when borrowers have lower credit scores or smaller down payments. 

So, when it comes to FHA versus Conventional rates, lenders are often more comfortable offering lower rates on FHA loans.

How much lower are interest rates for FHA loans?

FHA loan rates are typically smaller than those for Conventional, jumbo, and adjustable-rate mortgages (ARMs). They may even be lower than for 15-year mortgages and U.S. Department of Veterans Affairs (VA) loans.

For example, interest rates for an FHA loan were half a point lower compared to a Conventional loan on June 10, according to Mortgage News Daily.

They were 68 basis points lower than for jumbo loans, 15 lower for ARMs, three lower than 15-year-mortgages, and two lower than for VA loans.

The many benefits of FHA loans

In addition to lower interest rates, FHA loans offer a few other advantages.  

First of all, you don’t need good or excellent credit to get approved. You may be able to qualify for one of these loans with a score as low as 500, depending on your full financial picture.

Also, you don’t need a lot of cash saved up for a down payment.  If you have a credit score of at least 580, you can put down as little as 3.5%. For a score between 500 and 579, you’ll only need 10%.

However, gift funds are allowed. Your entire down payment can come from a gift if you’re lucky enough to receive one.

Another advantage that many buyers overlook is that FHA loans are assumable. That means a future buyer can take over your existing mortgage, including your rate and remaining balance instead of getting a new loan.

“If rates rise, a buyer may be very interested in assuming your FHA loan. This is a huge plus if you plan to sell some time in the future,” said Montes.

Additionally, FHA loan limits can go quite high in more expensive areas. In 2026, the limits range from $541,287 to $1,249,125, so most buyers aren’t limited to starter homes with these mortgages.

How the mortgage insurance premium works on FHA loans

One of the biggest downsides to FHA loans is the mortgage insurance premium.

There’s an upfront mortgage insurance premium (UFMIP) of 1.75% of the loan amount. This fee is usually rolled into the loan rather than paid in cash at closing. 

Then there’s an annual mortgage insurance premium (MIP). This typically ranges from about 0.5% to nearly 2% of the amount borrowed for 30-year loans. This is generally paid every month as part of your mortgage payment.

The length of time you’re required to pay the annual MIP depends on your down payment. 

If you put down less than 10%, the mortgage insurance is permanent for the life of the loan. However, if you put down 10% or more, it drops off after 11 years. 

“The most common way buyers eliminate MIP entirely is by refinancing into a Conventional loan once they’ve built up enough equity, typically 20%,” said Montes.