You may have heard that refinancing your FHA loan is a smart choice that will help you save money in the long run. Everyone likes to save money, so why not look into your options? Most know that a conventional loan can be refinanced, but is this the case for an FHA loan?
Yes, you can refinance an FHA loan. However, there are criteria you must meet, just as when you applied for your original loan to buy your home. When it comes to refinancing, there are both advantages and disadvantages that you will need to weigh. There are also several options and ways to go about refinancing your FHA loan.
How does refinancing work?
Refinancing involves replacing your current loan with a new mortgage loan. The new mortgage loan will then be used to pay off your original mortgage, with new terms such as a new interest rate and new term length.
In the case of a cash-out refinance, any money left over from your new loan will go straight to you. This cash becomes available based on how much equity you have paid into your home in the past.
Types of FHA refinance loans and why to refinance
Knowing you have the option to refinance an FHA loan, you may wonder if now is the right time. These are common reasons homeowners choose to refinance an FHA loan:
- Mortgage rates dropped recently
- The value of your home has gone up
- You may need the extra cash
- You would like to switch over to a conventional loan
- You could save money in the long run
The one you choose will ultimately depend on your goal and why you are looking into refinancing your home.
If your primary purpose is to lower your current monthly payments or to shorten your loan term, then FHA Streamline may be the better option. If you need the extra cash, an FHA Cash-Out would be a reasonable choice.
This type of refinancing is made to be quick and easy. Since you have already obtained an FHA loan from your lender, and met their requirements once, they will need less paperwork from you. In most cases, a credit check and appraisal will not be necessary this time around.
To be eligible for an FHA Streamline, you still must meet a few basic requirements:
- You’re up to date on paying what you currently owe for your existing mortgage
- You have not missed any mortgage payments
- You have made consistent payments on your mortgage for at least six months
If you’re looking to receive cash from refinancing, a Streamline loan is not the route you want to take. You will receive no more than $500 cash if you choose this refinance program.
If you are looking to receive a larger amount of cash, you are probably most interested in Cash-Out refinancing.
This will be a great option to help you pay down debts such as the following:
- Student loans
- Credit cards
- Car loans
- Other high-interest debt
You may otherwise decide that you need to make some home improvements to maintain your home’s appeal and condition. This is another reason people choose to do a cash-out refinance.
To qualify for an FHA Cash-Out refinance, you will need to have paid on your current loan for at least 12 months while having 20% or more equity paid into your home. In addition to this, the lender will need more paperwork, when compared to a Streamline refinance.
Should you switch from an FHA loan to a Conventional mortgage?
Pros to refinancing to a Conventional loan
If you are looking into refinancing your home, it can be beneficial to switch from your government-backed FHA loan to a conventional mortgage. While an FHA loan is an outstanding first-time homebuyer loan, it can cost you more in the long run.
When switching to a conventional mortgage loan, you can knock off your FHA-required Mortgage Insurance Premium (MIP). Since MIP lasts the loan’s lifetime, getting rid of this extra monthly cost could make a tremendous difference to your monthly expenses.
When initially obtaining your FHA loan, you may have been approved at a higher interest rate than what you could qualify for now. Qualifying for a lower interest rate makes refinancing a great decision, as it saves you money on interest in the long run.
Cons to refinancing to a Conventional loan
While refinancing to a conventional loan may save you money in the future, it doesn’t mean that it comes without fees and closing costs. To refinance your home and switch to a conventional loan, you will need to pay closing fees, which can add up.
To see if you qualify, you would need to fill out more paperwork and provide documents such as pay stubs, a credit report, and tax returns. This can be stressful and more time-consuming for some.
Unlike with an FHA loan, if you switch to a conventional loan, you will need a higher credit score. To avoid paying Private Mortgage Insurance (PMI) when refinancing to a conventional loan, you need at least 20% equity paid into your home. Otherwise, you can refinance to a conventional loan without 20% equity, but you would still need to pay PMI.
Therefore, while a conventional loan may seem ideal to you, you will need to evaluate your current situation and what option would work best for you.
Learn if refinancing your FHA loan is right for you
Many people can benefit from refinancing their FHA loans. In the long run, you can usually save money. If you are looking to remodel your home to increase its value, or you want to pay off high-interest debt, refinancing can get you that extra cash you need. With the many options, it is wise to speak with a loan officer.Reach out to us, and we will help you decide if refinancing your FHA loan is right for you.
By refinancing your existing loan, your total finance charges may be higher over the life of the loan.