Editor’s note: This article was originally published in 2010 but has been updated for 2013.
Reader question: “I always read articles that say to shop around for a good rate on an FHA loan, but I don’t know what’s good or bad. All I see are the rates offered on lenders’ websites. How do I put the numbers into perspective? What is considered to be a good interest rate on an FHA mortgage in 2013?”
That’s an excellent question, and I know exactly where you’re coming from. The word “good” is meaningless without context. A lot of websites stress the importance of getting a good rate on a home loan, but they don’t tell you what that is. So let’s talk specifics…
A Good Rate, Defined
Here’s a concrete definition for you. A good interest rate on a mortgage is one that is close to the average being issued at the time you apply for a loan, or lower than average. If the lender charges you more interest than the average borrower (for whatever reason), you’re not getting a good rate on the FHA loan. On the other hand, if you get charged less interest than the average borrower, you’re getting a good rate. So it all starts with the averages.
How to Find Average FHA Rates
So how do you determine the average rates being given out by lenders? There are several ways to go about it. I recommend using the Freddie Mac weekly survey of the primary mortgage market. It’s officially called the Primary Mortgage Market Survey, or PMMS. They’ve been running this survey since 1971. It gives you a pretty good idea what kind of rates lenders are offering. It also shows you if rates have gone up or down over the last few weeks or months.
Note: The Freddie Mac PMMS is not specific to FHA loans. But the average rates assigned to FHA loans typically track closely with the averages shown in the PMMS. So it’s pretty much the same thing. You can also use our FHA rate survey to get a feel for what’s being offered these days.
This is where you need to start — with the averages. By using the PMMS as a baseline for your research, you’ll have a better sense of what the lender is offering you. Without this kind of data, you won’t know if you’re being offered a good rate or a bad one. It’s important to have this kind of perspective when applying for an FHA loan.
If the lender’s offer is in line with the average rates being issued, then you can consider it a good rate. If it’s lower than the average, even better! But if it’s higher, you need to find out why.
An Example Scenario
This will make a lot more sense if we use some actual numbers. At the time of publication (March 2013), the average rate on a 30-year fixed mortgage loan was 3.63 %. If I apply for an FHA loan, and the lender says they are willing to offer me a rate of 3.60%, I would consider that to be a good offer. Anywhere in the average range could be considered a good rate, actually.
On the other hand, if they come at me with an interest rate quote of 3.8% or above, I would want to know why. Is my credit score too low? Down payment too small? Do I need to pay points to lock in a better rate? What’s the deal?
But it all starts with doing the research. You need to find out what kinds of FHA rates are available at the time you apply for a loan. It’s the only way to know if you’re being offered a good deal on the mortgage.
Don’t Forget: Qualifications and Points
There are two key concepts you need to keep in mind when shopping for a loan. The first concept has to do with your qualifications as a borrower. The second concept relates to “interest points,” and how they can help you secure a lower rate on an FHA mortgage.
When assigning interest rates on home loans, lenders usually start with a baseline number and then adjust it up or down based on the borrower’s qualifications. A well-qualified borrower will have an easier time getting a good rate on an FHA loan. A poorly qualified borrower will be lucky to get approved at all, and will likely end up with a rate that is higher than the average (i.e., a more expensive loan).
So you need to be realistic when shopping or a loan. For example, if your credit score is below average, you shouldn’t expect the lender to offer you their best FHA rates. Learn more about mortgage qualifications here.
The second point to keep in mind has to do with mortgage points. Earlier, we talked about the average rates reported each week by Freddie Mac. They also report the average number of points people are paying, in order to secure those rates. Points are a form of prepaid interest. They are also referred to as discount points and interest points. One point is equal to one percent of the loan amount (example: $2,500 on a $250,000 loan). You can pay points at closing to secure a lower interest rate on your FHA loan. So, if you’re not offered a good interest rate on the mortgage loan from the start, you could ask the lender about paying points to get a better rate. Learn more here.
This article answers the question: What is a good interest rate on an FHA loan in 2013? If you would like to learn more about this subject, you can use the search tool located at the top of the website. You might also want to read this article about negotiating with lenders.