Refinancing can be an excellent way to lower your monthly payment, shorten your loan term, change loan products or even get cash from your home equity for remodeling, paying bills and more.
For homeowners with FHA loans, there are several ways to approach a refinance, each with its own unique advantages and use cases.
There are a number of ways to go about an FHA refinance. FHA homeowners can utilize any of the following options:
The two most common types of FHA refinances are the Cash-Out and the Streamline.
Many homeowners shy away from refinancing, for fear it’s too time-consuming and burdensome. The FHA Streamline refinance aims to refute that assumption, offering a quick, easy and hassle-free road to refinancing an existing FHA loan.
The FHA Streamline refinance is meant to be a quick, painless process for existing FHA borrowers. The assumption is that because the homeowner has already passed the FHA’s stringent requirements once, they do not need to be as carefully vetted the second time around. This results in less paperwork, a shorter underwriting period and less focus on the borrower’s credit and financial documentation.
Homeowners who already have an FHA loan, are current on their payments and can see either a long-term or short-term net benefit by refinancing may qualify for this option.
Lenders might require the existing FHA loan be at least 210 days old. Talk with lenders about their guidelines regarding what’s known as “seasoning.”
Depending on your situation, you may be able to get an FHA Streamline without an appraisal. Since appraisals come with a fee, this can save homeowners several hundred dollars.
Homeowners can still choose to get an appraisal, and doing so qualifies you to include closing costs in your new loan amount. This would increase your monthly payment slightly but lower the upfront costs of your refinance.
Homeowners who use the FHA Streamline refinance program also might be eligible for a refund on their initial MIP (mortgage insurance premium). The amount of this refund decreases every month after your initial loan closing.
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The FHA Cash-Out refinance is designed for borrowers looking to tap their home equity. To qualify, homeowners need to have at least a 15 percent equity stake in the property.
Qualified homeowners can use this cash to pay bills, make home improvements and more.
The FHA Cash-Out refinance is fairly simple. A homeowner applies for a new FHA loan based on the property’s current market value. The new loan is then used to pay off the first mortgage, and the homeowner receives the difference between those two balances in cash.
This is a brand-new loan with a new monthly payment, rather than a home equity loan or home equity line of credit. These loans require more in-depth underwriting than a Streamline refinance.
The biggest difference between a Cash-Out refinance on a conventional loan versus one on an FHA loan is the mortgage insurance required. FHA cash-out refinances require mortgage insurance that is two-fold:
The annual premium is paid in monthly installments and rolled into your regular payment. With an FHA Cash-Out, most homeowners pay this premium for the first 11 years of their loan term.
Conventional loans don’t have these requirements, but they also come with lower loan-to-value ratios and more stringent credit requirements.
Homeowners looking to utilize the FHA Cash-Out refinance need to meet a few qualifications first.
Some of those requirements can include:
The home being refinanced must also be the borrower’s primary home (and have been for the last 12 months).
Lenders will often have their own guidelines in addition to what the FHA requires.
There’s no limit to what homeowners can use their Cash-Out funds for. Many put them toward home renovations or remodeling projects, while others use them to pay off higher-interest debts, cover college tuition, pay medical bills and more.
Homeowners also have the option to refinance out of their FHA loan altogether, replacing it with a conventional loan moving forward. There are pros and cons to this, and the best decision depends on the borrower’s unique financial situation and long-term goals.
The biggest advantage when refinancing to a conventional loan is that it removes the upfront and annual mortgage insurance requirement. As noted above, FHA loans come with two-fold insurance fees that increase both the initial cost of the refinance and the borrower’s monthly payment.
Another benefit to conventional refinancing is that there are larger loan limits. This can be beneficial if you’re looking to cash out and tap your home equity.
There are disadvantages to refinancing into a conventional loan, though.
Conventional loans often come with:
Generally, refinancing into a conventional loan will cost borrowers more than refinancing into a new FHA mortgage, at least at the outset.
Refinancing from an FHA loan to a conventional one may be beneficial if:
Remember that FHA-to-conventional refinances will follow the traditional underwriting process and may take longer than something like an FHA streamline refinance would.
Conventional loans typically have stricter credit, income and financial requirements than FHA loans typically do.
To qualify, borrowers may need:
Guidelines and requirements can vary by lender.
The biggest differences between FHA and conventional loans come in the way of loan-to-value requirements and mortgage insurance. Mortgage insurance can be canceled on conventional loans after 20 percent equity is gained. On FHA loans, however, mortgage insurance premiums are required for much longer periods.
FHA refinance rates vary week by week, with the country’s overall economic state, the stock market, Federal Reserve policies and more all playing a role in its fluctuation. Rates also vary by term. On a 30-year mortgage, borrowers will typically pay a higher rate than those willing to repay their loan faster, say in 10 or 15 years.
To provide some clarity, look to resources like the Ellie Mae Origination Insight Report to see recent trends in rates. Generally, average rates on FHA loans are comparable to average conventional mortgage rates.
Keep in mind that rates also vary from borrower to borrower. The rate you get quoted can depend on your credit score, your loan-to-value ratio, how much you’re borrowing, the type of loan you’re choosing and more. Be sure to talk to a reputable lender for a more accurate rate estimate.
From lower monthly payments and less paid in interest to a shorter loan term and quick access to cash, refinancing your FHA loan can bring a lot of potential value. Still, an FHA refinance isn’t right for everyone.
A lender who knows FHA refinance options can help assess your specific situation and explain your options in detail.