My previous blog suggested that the Homepath Renovation loan can be a better option than a 203K streamline. Which I still believe but wanted to go into more detail on the costs associated with the two programs.
The actual closing costs between the 2 programs are pretty similar so to break down those costs may be a bit overkill so I will focus on the major differences.
Downpayment: FHA requires a 3.5% down payment while the Homepath Renovation loan only requires a 3% down payment.
Interest rate: You will almost always find that and FHA 203(K) loan will have a lower rate compared to Homepath. However that lower rate comes at a cost. The 203(K) loan requires 1% upfront mortgage mortgage insurance to be charged. That fee is typically financed into your loan amount. Your loan amount will be higher.
In the example I provided (Total Cost Analysis), the FHA loan amount is increased by $3,008 and your monthly payments are based on the higher loan amount. In Addition, (using the same Example) the fha loan also requires monthly mortgage insurance of $225.67 per month. Mortgage insurance is dropped on an FHA loan when the loan balance reaches 78% of the original loan to value. Mortgage insurance will remain on the example I provided for roughly 124 monthly payments ($27,983.08), unless the borrower pays additional to principle.
The homepath loan would require the consumer to pay 2.125% in points, which will add an additionl $6,393.85 to the closing costs associated with the homepath loan. If you do not have enough in assets to cover this additional costs then the 203(K) loan will be your better option. If you do have the assets the home path loan may be the better option.
Difference in Principle Balance
The first difference you need to account for is your principle balance. Initially your loan balance will be $1,414.45 higher with the FHA loan (meaning you have less equity in the home with an FHA loan than a homepath loan). The difference in the loan balances will get closer with each payment because of the difference in the rates. You will be making a bigger principle payment with the 203K loan (but you have a higher loan amount). The balance will be roughly the same after the 42nd payment.
The next difference is the monthly payment (the actual check you will be writing every month). The factors that impact the payment are the loan balance, interest rate & monthly mortgage Insurance. You will be writing a bigger check monthly on the FHA loan until the mortgage insurance drops off. At which point you will have spent an additional $17,460.44 out of pocket if you had opted for a 203(K) loan over the Homepath loan.
Total Cost Out of Pocket
Right out of the gate your are behind if you have chosen the Homepath loan over the 203(K) loan because of the additional 2.125% in points that increased your closing costs by $6,393.85. To see where you stand you need to consider your current equity position along with how much you have paid out in mortgage payments. After payment 1 you will have $1,414.45 in equity and you will have saved $140.81 in a mortgage payment. If you were to pay off this mortgage after your 1st payment and had chosen the homepath loan, that choice would have cost you $4,838.59 ((Points)$6,393.85 minus (equity) $1,414.45 minus (payment savings) $140.81). That number remains a loss until you make your 47th payment at which point you will have a higher principle balanceof $198.67 but will have saved an additional $6,618.07 in monthly payments if you opted for the homepath loan at the higher rate with no mortgage insurance. At that point Homepath will have saved you a whopping $25.55. However, that savings will continue to increase between your 47th payment and your 124 payment at which point you will have saved $8,417.29 and will remain a positive number until you make your 204th payment.
I would argue that the Homepath Renovation loan is the better loan option if you end up keeping the mortgage in place for anywhere between 47 and 204 payments, provided the additional closing costs of the Homepath loan are manageable for you.
I hope this helps to clarify the break even points.