If you already have an FHA loan, you may be familiar with the option to refinance, but does it worth it? In this article, we are going discuss in detail what FHA loan refinancing means and other things you need to know.
FHA is a known loan option for first-time buyers and people who have bad credit. These are normally insured by the Federal Housing Administration (FHA), whose main goal is to support low-to-moderate-income borrowers who might find it difficult to qualify for conventional loans.
FHA Loan Eligibility
- To apply for an FHA loan, a borrower has to have a credit score of at least 580 (although some lenders may accept lower scores) and a down payment of at least 3.5%.
- Applicants must also fulfill a debt-to-income ratio requirement, have a job, and steady income sources.
Pros of FHA loans:
a) Lower down payment
FHA loans generally have a lower down payment’ requirement than conventional ones. This helps buyers with low savings afford a house.
b) Flexible credit requirements
Borrowers with low credit scores can still be eligible for FHA loans because the credit rating is a bit lenient compared to conventional loans.
c) Low interest rates: FHA loans frequently feature a lower interest rate, which may lead to lower monthly mortgage payments.
d) Assumable loans
FHA mortgages are assumable, which means that if you decide to sell your home, the new owner assumes your loan and pays you the remaining amount. You can use your FHA loan to possibly make your home more attractive to buyers.
Cons of FHA loans:
a) Mortgage insurance premiums (MIP)
FHA loans require two mortgage insurance premiums: the upfront mortgage insurance premium (UFMIP) and the annual mortgage insurance premium (MIP). This can make the overall cost of the loan more expensive.
b) Loan limits
FHA loans have limits on the amount you can borrow that may restrict your options if you need a more expensive home.
c) Property requirements
Under an FHA mortgage, a qualifying property has to meet some minimum conditions. Doing so limits your possibilities.
Some lenders may restrict the amount of funds available to you or may require you to complete some repairs before they grant you the loan.
d) Limited availability
Keep in mind that FHA loans are available only for primary residences. If you want to invest in a vacation home or rental property, you may have to look for other types of financing.
What is FHA refinancing?
Refinancing is the process by which an old mortgage is replaced with a new one with different terms and conditions. The main purpose of refinancing is generally to obtain more favorable conditions, like a lower interest rate, a shorter loan period, or a change a change from an adjustable-rate to a fixed-rate mortgage.
Reasons to Refinance an FHA loan
Lower interest rates: Refinancing can provide great opportunities for the borrowers to take advantage of the lower rates, which may decrease their mortgage payments.
Shorten loan term: Switching the loan for a shorter term, from 30 years to 15 years (mortgage for example), can help.
The debtors pay off their loan in an earlier period and, consequently, spend less than they would in the long term by being free of interest.
Convert to a fixed-rate mortgage: If you have a FHA loan that has an adjustable rate, refinancing to a new fixed-rate mortgage can guarantee stability and protect you from future interest rate rises.
Remove mortgage insurance: If you have accumulated sufficient equity in your house to refinance it, you might cut the mortgage insurance premium (MIP) on FHA loans, which will save you money on your monthly payments.
Cash-out refinance: Refinancing with a cash-out option makes it possible for a borrower to withdraw a certain amount that exceeds the outstanding loan balance.
Types Of FHA Loan Refinancing Options
1. FHA Streamline Refinance
The product is intended for FHA borrowers to refinance their loan easily with no need for a credit check or appraisal. The purpose is to lower monthly payments or change the terms of the loan.
2. FHA Cash-Out Refinance
Makes it possible for people to cash in on the equity of their homes by refinancing their loan at a higher amount than what they owe already. The part that gets converted into money is what remains.
3. FHA Simple Refinance
Otherwise referred to as the “rate and term” refinance, it allows the homeowners to refinance their current FHA loan to a new one with a lower interest rate or different term length. The lender will confirm will need some appraisal.
4. FHA Rehabilitation Loan (203(k))
Merges a home purchase or refinance loan with a renovation or repair loan. It’s perfect for people seeking to renovate or reconstruct their home.
There are two types of FHA 203(k) refinances: standard and limited. A standard 203(k) refinance must repair these damages to at least $5,000, and you must use a 203(k) consultant to make sure the work is being done.
Limited 203(k) does not need a consultant but can only be used for repairs that are not structural and cost $35,000 or less. Regardless of the type of 203(k) refinance you obtain, all of your repairs or upgrades will have to meet FHA eligibility conditions.
Pros and Cons of Refinancing an FHA Loan
Pros of Refinancing an FHA Loan
i. Lower monthly payments
Refinancing can lead to lower monthly mortgage payments, especially as the new loan has a lower interest rate or a repayment plan with a longer term.
ii. Reduced interest rate
Through refinancing, borrowers may be able to get the interest rate lowered, which can bring about considerable savings over the course of the repayment.
iii. Access to cash through a cash-out refinance
The borrowers can pull out the equity of their homes and use it to pay for home renovations, credit card payments, and other expenses by cashing out
Cons of Refinancing an FHA Loan
Closing costs: Refinancing comes with some appraisal fee. At the end, is it worth it?
Extending the loan term: When you refinance to a longer repayment term, the interest rate increase.
Impact on mortgage insurance premiums: Refinancing may affect mortgage insurance premiums (MIP), especially if the new loan amount is greater than 80% of the property value. If the ending MIP rate is lower than the initial rate, the savings from refinancing will be higher, while if the ending MIP rate is higher than the initial rate, the savings will be lower.
Steps to Refinance an FHA Loan
1. Preparing financial documents
Collect the required financial documents, which include pay stubs, tax returns, bank statements, information about the current FHA loan, and so on. These documents will be used by the lenders to analyze your financial situation and decide whether they can refinance you or not.
2. Shopping for lenders
Research and scan lenders to discover the best refinance rates and conditions. When choosing a lender, consider factors like interest rates, closing costs. Also, you should get multiple quotations to know which one is the best.
3. Submitting an application
Finally, you have to pick a lender and submit an application for refinancing. Provide
Complete and up-to-date information about your income, property, debts, and existing FHA loan. The lender will consider your application and may ask for additional documents during the underwriting process.
Read also:Â Types of Mortgage Loans: The Best for Your Finance
Conclusion
One of the advantages of FHA loan refinancing is the reduction of interest rates, which will help you save money over the life of your loan. In addition, FHA loans can provide borrowers with up to 80% of the equity of the home, giving them the chance to consolidate debt, make home upgrades, or address other costs.
However, you should consider the cost connected with refinancing, which can include closing costs and mortgage insurance premiums.
