For many first-time homeowners, an FHA mortgage loan offers the flexibility you need to afford a home. One perk for FHA borrowers is the convenient FHA streamline refinance.
Once some time has gone by in your new home, you might wonder about refinancing your FHA loan. FHA borrowers do have the option of a conventional refinance.
If you’re looking to take advantage of current interest rates or adjust your terms, you have a few options to consider.
Let’s take a look at whether an FHA streamline refinance or conventional refinance would be better for you.
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What are Your Refinance Options?
When you refinance your home, you replace your current mortgage with one that’s more favorable. This can include a lower interest rate, changing your term length, or cashing out your equity.
If you currently have an FHA loan, your refinance options include an FHA Streamline refinance or a conventional refinance.
FHA Streamline Refinance
The greatest benefit to the FHA Streamline refinance is its simplicity.
Just like your current loan, an FHA Streamline is backed by the Federal Housing Administration.
With this type of refinance, an appraisal is not required, and you don’t need to show income verification. There is no minimum credit score required, and no prepayment penalty.
If the current market interest rates are lower than your FHA purchase loan rate, you may be able to lower your interest rate with the streamline process. This, in turn, will lower your monthly payments.
You also can convert your adjustable-rate mortgage to a lower, fixed rate.
With a conventional refinance loan, you have more options.
There are two types of conventional refinance loans:
- Rate-and-term refinance
- Cash-out refinance
A rate-and-term refinance is the most common type. It allows you to potentially adjust the following:
- Lower your monthly payment by lowering your interest rate
- Eliminate mortgage insurance costs if you have 20% or more home equity
- Pay down your mortgage faster by shortening your term length
A cash-out refinance replaces your current mortgage with a larger one that is up to 80% of your home’s value. When you close on your new loan, you receive the difference in cash.
Many homeowners who purchased their home with an FHA loan opt to refinance to a conventional loan so they can get rid of their mortgage insurance. They often use their equity to pay down debt or make home improvements, as well.
Requirements for Conventional and FHA Streamline Refinance
With more options comes more requirements and costs.
An FHA Streamline offers less, so it requires less from borrowers.
A conventional refinance offers a wider range of terms and opportunities, and with that comes closing costs and stricter requirements.
Let’s look at the differences in the requirements, qualifications, and costs for each type of refinance loan.
FHA Streamline Requirements
To qualify for an FHA Streamline refinance loan, you must have an existing FHA-insured mortgage, up-to-date payments made over the past six months, and no more than one late payment in the past year.
Processing streamline loans is much more efficient for lenders because it requires less documentation. To refinance, you’ll need:
- Current mortgage statement
- Employment verification
- Two months of bank statements
- Recent utility bills
Since the process is much simpler and no appraisal is required, loan origination fees are lower. You still will have some closing costs to pay, but may have options to trade these fees in for a slightly higher interest rate.
Keep in mind that by switching to another FHA loan, you’ll still have to pay mortgage insurance premiums. However, the ease of qualification and lower interest rates usually make these types of loans worth it to borrowers.
Conventional Refinance Qualifications
Unlike an FHA refinance, you can refinance to a conventional loan even if you have another loan type, such as an FHA or VA loan.
The qualifications for a conventional refinance include:
- Employment history and verification
- Income documentation
- Debt-to-income (DTI) ratio at or below 50%
- Loan-to-value (LTV) ratio of 80%, which means you have at least 20% equity in your home
- Minimum credit score determined by lender
If you do not have 20% equity in your home, you will be required to pay monthly for private mortgage insurance.
Closing costs for conventional loans usually range between 2% and 4% of your loan amount. These costs include the loan origination fees and an appraisal.
With the support of your trusted mortgage loan officer, you will need to determine whether the costs and savings of your new loan are worth your while.
How to Refinance with the Right Mortgage Loan Officer
The decision to refinance comes with many considerations. The right mortgage loan officer is interested in building a relationship with you to help you determine which loan options are best for your unique situation.
If you’re ready to take the next step in refinancing to an FHA streamline or conventional loan, reach out to the experts at River City Mortgage today.
We look forward to using our knowledge and experience to help you make the right decisions.