If you currently have an FHA mortgage, a mortgage loan backed by the Federal Housing Administration (FHA), you might be able to replace it with a new mortgage and a lower interest rate.
It seems like everywhere you turn, people are taking a new interest in mortgage loan refinancing. It began with the Federal Reserve’s decision to drop interest rates by half a percentage point at the beginning of March last year and the subsequent drop again to between 0.00% and 0.25%.
Refinance An FHA Loan: What Lower Interest Rates Really Mean
With rates as low as these, it can be a great time to refinance an FHA loan, especially if you are currently paying a higher interest rate. A lower interest rate could save you hundreds of dollars monthly and thousands of dollars over the lifetime of your mortgage.
Refinancing your FHA loan to get a new mortgage with an interest rate reduced by 1% or 2% can significantly impact how much you pay each month. It can also make it easier for you to pay off your mortgage quicker than you initially planned.
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When is the Right Time to Refinance Your FHA Loan?
If you’ve had your FHA loan for a minimum of six months, you may be able to refinance it at any time. But before making the final decision to refinance, it’s essential to consider your overall financial situation, including your credit history and score. You’ll also benefit from looking into the closing costs associated with a new loan, as well as how long you hope to stay in your home.
If refinancing your FHA loan will result in one or more of the following points, it’s generally considered a good decision and the right time to refinance an FHA loan:
- Save you money
- Pay off your mortgage sooner
- Grow the equity in your home
- Reduce your interest rate by 0.5% to 0.75% of a percentage point
And with rates as low as they are, even relatively new homeowners or homeowners with relatively new mortgages may be eligible to see a benefit from refinancing an FHA loan.
Current Historically Low Rate Environment
Freddie Mac started tracking mortgage rates in 1971 through the Freddie Mac Primary Mortgage Market Survey (PMMS). The PMMS found that today’s 30-year fixed interest rate has never been this low, making it arguably the best time in the last 50 years to own your home.
Step-by-Step Guide to FHA Streamline Refinance
Refinancing simply means swapping out your current mortgage loan for a new one. You can use your new loan to pay off your initial mortgage, often with new terms, such as a lower interest rate.
Popular FHA refinancing options include:
- FHA Streamline Refinance
- FHA cash-out
- Switching to a conventional mortgage loan
FHA Streamline Refinance Loan
An FHA Streamline Refinance loan designed to be quick and relatively painless. It’s built around the fact that you already qualified for an FHA loan when you got your initial mortgage – so they consider you still eligible.
This means you have less paperwork to complete and submit. And for a majority of borrowers, home appraisals and credit checks aren’t mandatory. You will need to meet a few additional requirements to be eligible for an FHA streamline refinance loan.
- You must currently hold an FHA-backed mortgage
- You must have made all mortgage payments in full and on time; no missed or late payments
- Your mortgage must be up-to-date; you can’t owe any back payments or need to catch up
- Refinancing must bring about a “net tangible benefit,” in other words, it needs to save you money. This can happen either through reducing the combined total of your mortgage interest rate and MIP by at least 0.5 % or shortening the length of your mortgage.
- Your new mortgage can’t be for more than the current mortgage amount.
- You must have your mortgage for a minimum of six months and successfully made payments for at least six months.
An FHA streamline refinance won’t get you any significant money upon closing. The maximum you can receive is $500 cashback through an FHA Streamline refinance.
FHA Cash-out Refinance Loan
If you are considering refinancing your mortgage as a way to get more than $500 cash, the FHA cash-out refinancing option might be for you. Once the refinancing is complete, the money is yours to spend as you choose.
Like the FHA streamline, an FHA cash-out refinance loan has a few special requirements:
- You’ll need to have your mortgage for a minimum of twelve months, and you’ve successfully made payments for at least twelve months
- You’ll need to have at least 20% equity built up in your home
While both FHA Streamline and FHA cash-out fulfill the same primary purpose of paying off your initial mortgage, an FHA streamline gives you the option to lower monthly mortgage payments. As its name implies, FHA cash-out provides you with cash.
If you choose a cash-out refinance option, you get any money left over after paying off your initial mortgage. You also would have the option to pay off other higher interest credit card debt or loans.
Refinance to a Conventional Loan
If you originally got an FHA loan because it was a better financial fit, refinancing now with a Conventional Mortgage Loan might help you get lower insurance premiums.
Alternately, if the equity in your home is at least 20%, you might be able to eliminate the mortgage insurance premium (MIP). And since the MIP lasts the length of your mortgage, eliminating it could wind up putting more money in your bank account at the end of each month. Even with less than 20% equity, it may be possible to obtain a conventional mortgage loan with less expensive private mortgage insurance than you have on your FHA loan.
Conventional mortgage loans can also be a great option if your credit score has improved since you first bought your home. The amount of interest you have to pay is tied to your credit history and credit score — the higher, or better, your credit score, the lower your interest rate. Having a mortgage and making payments in full and on time can often be enough to improve a borrower’s credit score.
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Should You Refinance Your FHA Loan?
The decision to refinance an FHA loan requires careful evaluation of your financial situation and goals. We’d love to get together with you and go over all the options you have available and help you make the right decision for your family.
For a no-fee consultation — virtually, in our office, or at your kitchen table — or for more information, get in touch with River City Mortgage’s FHA regional loan officers.
Photo by Andrew Neel on Unsplash