If you currently have a mortgage backed by the Federal Housing Administration (FHA), you might be curious about why everyone is suddenly talking about refinancing. If you are interested in learning more about whether you can or should refinance your FHA loan (the answer is probably, Yes) keep reading.
What Does Refinancing Really Mean?
The word ‘refinance’ means getting a new mortgage loan, often with different terms such as a lower interest rate or a shorter length, and using your new loan to pay off your original mortgage. When you refinance, you essentially swap out a more expensive loan for a more economical one. The two most popular FHA refinance loan options are the FHA streamline refinance loan and the FHA CashOut refinance loan.
Why Refinance Your FHA Loan?
While everyone has their own reason why to refinance an FHA loan, there are several common reasons. We’ll look at 10 of the most popular below.
1. Take Advantage of the FHA Streamline Refinance Loan Program
The FHA streamline refinance loan program makes it easier and more straightforward for borrowers with an FHA-backed home loan to refinance their mortgage at lower rates.
The FHA streamline refinance loan program allows borrowers to provide a reduced amount of documentation to get approved. This applies to any FHA mortgage, even those underwater, if the mortgage amount is greater than the home value.
It also offers low and no-cost options. This means you can reduce or eliminate most out-of-pocket expenses often tied to refinancing by rolling those expenses into the total mortgage amount. The FHA streamline loan also has some of the fastest loan processing timeframes available today.
2. Get Money Back With FHA Cash-Out Refinance
If your home’s value has increased, you can access some of the value of your home through a cash-out refinance.
Cash-Out refinance is an option that lets you keep any money left over from your new loan after you pay off your first mortgage. How much money you will receive is based on the equity you’ve paid into your home. The money goes directly to you without additional restrictions; you can spend the cash however you want.
Eligibility for the FHA Cash-out option requires homeowners to have built up at least 20% home equity. You’ll need to have at least 12 months paid on your current mortgage loan.
3. Save Money With a Lower Mortgage Rate
Is the interest rate for your original mortgage loan higher than the historically low rates available today? If so, you could be paying more in monthly mortgage payments than you have to. Lowering your interest rate even one-half of one percentage point can translate into helping you save hundreds–or even thousands–of dollars or over the lifetime of your mortgage.
4. Avoid Paying Any Mortgage Insurance
When you refinance your FHA loan, you can avoid paying mortgage insurance altogether if you have more than 20% equity in your home. Mortgage insurance is only applied to loans when borrowers have a downpayment of less than 20% or less than 20% home equity.
5. Save Money by Switching To A Conventional Loan
While conventional loans can have more stringent eligibility requirements, they typically offer significantly lower monthly mortgage payments and shorter mortgage terms, helping you keep more of your money while getting out of debt faster.
If you’re considering refinancing your FHA into a conventional loan, be sure to take a look at closing costs. Many conventional loans come with fees and closing costs. But some lenders and programs allow you to roll closing costs into the total mortgage amount, letting you refinance without additional out-of-pocket expenses.
6. Get A Lump Sum Of Cash for Other Expenses
Who wouldn’t like to have a little extra cash in the bank? Whether you’re hoping to get in a few home renovations before summer, planning on a significant purchase like a car or a wedding, or would simply appreciate a fatter emergency fund, refinancing can deliver a lump sum of additional cash.
7. Get Out Of Debt Sooner
Refinancing your FHA loan allows you to shorten your mortgage’s lifespan, helping you get out of debt faster than you planned.
If you currently have a mortgage with a 20-year term, reducing the term of your mortgage by 5 or 10 years can lower the overall amount of interest you have to pay. Making slightly larger monthly payments for less time can save you thousands–sometimes tens of thousands–of dollars in interest you would otherwise have to pay.
8. Make Occasional Extra Payments On Your Mortgage
The FHA streamline refinance loan program allows homeowners to make occasional additional mortgage payments or pay off your mortgage earlier without further penalties.
9. Have Regular Mortgage Payment Amounts By Switching to a Fixed-Rate Mortgage From An Adjustable-Rate Mortgage (ARM)
Adjustable-rate mortgages are often good choices for first-time homeowners or borrowers working toward a particular financial goal, such as building home equity or getting an initial lower interest rate. But, as interest rates change, ARMs often become too costly for most homeowners. When you move from an ARM to a fixed-rate mortgage, you can take advantage of historically low-interest rates and lock in a regular payment amount while protecting yourself against future rate hikes.
10. You Hate Paperwork
Because you were initially eligible for your mortgage through the FHA program, the FHA streamline refinance considers you still eligible. That means you don’t need to provide new documentation, W2s or income tax forms, or get a new home appraisal.
If you’d like to find out more about whether refinancing your FHA loan is right for you, or to book a personal no-charge consultation, reach out to the FHA regional loan specialists at River City Mortgage. We are happy to sit down with you and can go over all the available options to help you decide the best course of action for you and your family.