If you want to buy a house but can't afford a 20% down payment, there's an alternative that might still make it possible to do so. Known as an FHA loan, after the Federal Housing Administration, these require a homebuyer to put only 3.5% down to qualify for a mortgage. And to further sweeten the pot, this type of mortgage is easier to get for people with low credit scores.
The one downside is that they're slightly more expensive. As Motley Fool contributor John Maxfield discusses in the following video, there are two specific added costs associated with getting an FHA, as opposed to a conforming, mortgage. The first is an upfront payment for mortgage insurance equal to 1.75% of the mortgage amount. And the second is an annual insurance fee over the life of the loan equal to between 1.3% and 1.55% of the credit line.
But even with these added costs, taking the plunge may still be worth your while, given the mortgage interest deduction and the opportunity to start building equity.
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