I was very surprised that you were quoted interest rates under 4% in NOvember 2013. I would strongly recommend that you verify the points charges on those loan offers as they are both *significantly* under the current market.
Your mortgage is a tax deduction with the current tax system, that means your interest rate is really a lot lower than you're paying.
A 200k mortgage at the example below of 3.75% yields an interest payment over the next five years of $35,728 If you divide this into a yearly average, that's $7,145 a year as a tax deduction. Lets say your tax bracket is a conservative, 25% (this would put your income in the 40k range, probably too conservative for this example), that means you'll get back (excluding any other tax liabilities) 25% of this interest which is $1,786. Now lets take $1,786 and divide it by 12 to get a monthly benefit and we come up with $149.
3.75% on a 200k loan is a payment of $926/mo and you're getting a benefit of $149/mo just for owning this home. We now calculate the effective monthly payment (and with that, we'll determine the effective rate) and we get $777/mo. Punching a few figures into my calculator, I find that a 2.375% rate on 200k will yield a $777/mo payment so this tells us we're really financing this loan at a 2.375% rate.
All of that math was to determine if it makes sense to pay down your mortgage or to invest your money in something else. Since I'm not a licenses financial advisor, I can't tell you what to invest in but I'm sure you can find something that will give you a 2.375% yield or better.
As for the initial comparison, we have a simple cost:benefit comparison. The 3.75% mortgage is $28/mo cheaper excluding PMI than the conventional loan but the PMI is $75 and $191.67 respectively. The FHA route is more expensive by $88/mo and you're also adding $2000 to your mortgage for the upfront insurance (technically my payments are slightly low as I didn't take into account the +2k premium but I'm trying to keep the math easy to follow). The upfront premium is a tax deduction as of last year according to my accountant in the year you assess it on a purchase so that $2000 is really only $1,500 in this scenario (remember, 25% tax bracket). So the end result is a combination of the answers below. If you're in a financial position to pay the 10% down and the single premium MI, it's a great idea to go this route. If you're straddling and concerned about your cash reserves, the MI rates are going to be higher with 95% conventional financing and your savings will be greatly reduced over the FHA option (although still a bit cheaper).
Another item to consider is how long you'll live there because your higher priced FHA loan is ASSUMABLE which means you can market your 3.75% rate to prospective buyers down the road to either attain top dollar or a quick sale. Down the road this rate will be extremely attractive to buyers who may be looking at financing the same house at higher rates (Your $926/mo payment now would be $1,135 at 5.5%, any buyer would love to have this rate in a higher rate environment).
Last but not least, if your husband's credit is at 665 and that's causing problems with optimal financing in other areas (credit cards, auto, etc), it may benefit you to put him on the loan to boost his credit over time to get him to a point faster where you can jointly apply for any financing and get the best available rates.
I hope this helped, best of luck to you!
P.S. If this was too analytical, you may also contact me and I can explain in less analytical terms over the phone (or more depending what you're after).
Best of Luck!
I prefer conventional financing over FHA any more as the PMI on FHA loans has become so expensive
However, what aboutf paying upfront one time Mi. (or Lender paid mortgage insurance). Rather than pay $90 per month for ten years , ($10800) pay approx 1% to 1.4% of the loan amount upfront to remove the MI. If you intend staying in the property for for 10 years you have saved over 9000. Plus every time you look at the mortgage statement you are not going to be upset by seein any monthly PMI.
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Also, conventional MI goes away after 2 years and if the loan is paid down to 78% of the original purchase price. FHA you need to wait 5 years + 78%.
Conventional loans have higher credit score standards and stricter debt-to-income ratios though as well.