Does it Make Sense to Refinance an FHA Loan?

You can get an FHA loan with a down payment that is as low as 3.5 percent of your property price. The credit score requirements are more lenient when compared to conventional loans. However, since it is guaranteed by the Federal Housing Administration, the mortgage insurance attached to it cannot be canceled. At some point of time, this mortgage insurance might make your monthly mortgage payments seem unaffordable. This is when you may consider refinancing your FHA Loan.

FHA Refinance Options

If you feel your FHA Loan is getting more expensive than a conventional loan, it might be time to get it refinanced. Nevertheless, it makes sense to get a feel of the FHA refinance options available, before jumping the gun. Here is a low down on the various FHA refinance options available:

FHA Streamline Refinancing

This program is designed to reduce your FHA interest rate and make your monthly payments more affordable, while allowing you a cash back up to $500. The procedure is simple and involves limited paperwork, without the need for a home appraisal. You can choose between a credit or a non-credit qualifying refinance. However, both these options necessitate credit checks. You may get a faster approval if you go for a non-credit-qualifying refinance.

Like in any other type of refinancing, there are closing costs that you will have to pay in FHA streamline refinance too. Nevertheless, you cannot get these closing costs wrapped into your new loan. Also, you will still need to pay your mortgage insurance.

FHA Simple Refinancing

This is the refinance option you would choose if you want to convert your adjustable interest rate FHA loan into a fixed interest rate FHA loan (or vice versa). You cannot expect to get any cash back with this refinance option.

FHA Cash-Out Refinancing

This is one option where you can take out a bigger loan, pay back your original loan, and use the extra cash for any of your expenses. You can go for this refinance option even if you have a conventional mortgage.  

FHA 203(k) Refinancing

Also known as a rehab loan, the FHA 203(k) loan is one loan that can help you get some money for house renovation and repairs. If you are making basic renovations under $35,000, you can go for a FHA 203(k) limited loan. On the other hand, if you need to spend on major structural repairs or full home renovations, FHA 203(k) Standard Loan would be ideal. Minimum amount you can get through a standard loan is $5,000.

Conventional Refinancing

Conventional Refinancing seems ideal when you want to get rid of your mortgage insurance. However, you can qualify for this refinance only if your home has a minimum equity of 20 percent on it. These loans are given by private lenders and they are not guaranteed by any government agency.

Pros and Cons of Refinancing FHA Loan

Pros

No more mortgage insurance

You can get rid of your mortgage insurance and make your monthly payments more affordable by refinancing your FHA Loan. The best way to do this would be to get your FHA loan converted into a conventional mortgage. However, as mentioned earlier, you would need at least 20 percent equity on your home.

Extra Cash at Disposal

By going in for an FHA Cash-out Refinance or even a FHA 203(k) loan, you can get some excess cash that you can use to make home improvements or pay off existing debts. By choosing a longer tenure you can even reduce your monthly payments.

Affordable Monthly Payments

Since you may have already paid back a part of your FHA loan, you will be left with a smaller principal balance. By refinancing your FHA loan at a lower interest rate, you can make your monthly payments more affordable. If you can get your mortgage insurance premium canceled, you can save even more.

Avoid forbearance

FHA loan refinancing is a better way than going into forbearance, which will reduce your mortgage payments or suspend them temporarily. Forbearance can have an impact on your credit report. FHA refinancing will not.

More Interest Savings

By going for a lower interest rate loan, you can save not only on your monthly payments but also on your interest costs over the term of your loan. For instance, if you refinance your 30-year 4 percent $200,000 loan into a new 30-year 3 percent loan, you get to reduce your monthly payment by $112. Over 30 years the total amount that you save adds up to over $40,000.

Cons

More Closing Costs

Whether you are taking out a new loan or refinancing your existing FHA loan, you will have to pay the closing costs. It will still make sense if you are going to live in your home for a longer time. Nevertheless, make sure the closing costs you pay do not negate the savings that you achieve through the refinance.

Increased Payments

If you are refinancing your existing FHA loan to a loan of shorter term, you will have to make a higher monthly payment. You will be saving on the overall interest costs; yet this might work well only if you have the extra money that is required. Else, you may end up in more debt.

Reduced Equity

By refinancing your existing FHA loan, you are definitely tapping into your home equity. This is especially true if you are selecting a cash-out refinance. Moreover, you will end up with a higher interest rate that might make your monthly payments bulkier.

The Bottom Line

There are many ways to refinance your existing FHA loan. You can contact many lenders through FHA live transfer leads and find some great ways to save money. However, make sure you explore your options and check what you qualify for, before making any decision. The new loan that you take should put you in a better financial position than your existing FHA loan. This is the thing that will make your decision worthwhile.