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. Just keep in mind refinancing may result in higher finance charges over the life of the loan.
- FHA Loan Refinancing Types
- FHA Streamline Refinance
- FHA Cash-out Refinance
- FHA to Conventional Refinance
- FHA Loan Refinance Rates
- Should I Refinance?
FHA Loan Refinancing Types
There are a number of ways to go about an FHA refinance. FHA homeowners can utilize any of the following options:
- FHA Streamline refinance - This type of refinance is designed to lower your interest rate and, subsequently, your monthly payment. It’s called a “Streamline” because it’s a fast, efficient process designed to save time and money.
- FHA Cash-Out refinance - This allows you to turn home equity into cash, which you can then use to cover home projects or other expenses you may be facing.
- FHA simple refinance - The simple refinance lets you replace your existing FHA loan with a new one. It can be a new fixed-rate loan or an adjustable-rate one.
- 203(k) refinance - The 203(k) refinance is also called a “rehabilitation” loan. It’s ideal for buyers looking to renovate or rehabilitate a downtrodden property.
The two most common types of FHA refinances are the Cash-Out and the Streamline.
FHA Streamline Refinance
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.
How Streamline Refinancing Works
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.
Who Qualifies for the FHA Streamline
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.”
Benefits of the FHA Streamline Refinance
- Less paperwork than other refinance options
- No credit check in some cases
- No appraisal in some cases
- Low or no closing costs
- Quick turn-around
- Competitive rates
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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FHA Cash-Out Refinance
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.
How Cash-Out Refinancing Works
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.
Conventional Cash-Out Refinance vs. FHA Cash-Out 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:
- An upfront mortgage insurance premium of 1.75 percent (rolled into the new loan)
- A 0.80 percent annual mortgage insurance premium
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.
FHA Cash-out Refinance Requirements
Homeowners looking to utilize the FHA Cash-Out refinance need to meet a few qualifications first.
Some of those requirements can include:
- Have at least 15 percent equity in the property
- Have a minimum credit score of 580
- Meet the FHA’s debt-to-income ratio guidelines
- Have no late mortgage payments within the last year
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.
Uses for the FHA Cash-Out Refinance
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.
FHA to Conventional Refinance
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.
Advantages of Refinancing to a Conventional Loan
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.
Disadvantages of Refinancing to a Conventional Loan
There are disadvantages to refinancing into a conventional loan, though.
Conventional loans often come with:
- More stringent credit, income and documentation requirements
- Higher closing costs and fees (especially when compared to the low-cost FHA streamline refinance)
- An appraisal
Generally, refinancing into a conventional loan will cost borrowers more than refinancing into a new FHA mortgage, at least at the outset.
When an FHA to Conventional Refinance Makes Sense
Refinancing from an FHA loan to a conventional one may be beneficial if:
- Current interest rates are lower than your existing rate
- You have significant equity in your home (you’ll need at least 20 percent in order to avoid mortgage insurance)
- Your home has gone up in value
- You have the cash flow to cover closing costs and fees
Remember that FHA-to-conventional refinances will follow the traditional underwriting process and may take longer than something like an FHA streamline refinance would.
Requirements of Refinancing to a Conventional Loan
Conventional loans typically have stricter credit, income and financial requirements than FHA loans typically do.
To qualify, borrowers may need:
- A credit score of 640 or above
- A debt-to-income ratio of 43 percent or lower
- A loan-to-value ratio of at least 80 percent
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 Loan Refinance Rates
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.
Should I Refinance?
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.