If you have an FHA loan – A mortgage backed by the Federal Housing Administration – You may be able to swap your mortgage for a new one at a lower interest rate.
Householders refinance their mortgages in record-breaking numbers by 2020, thanks to historically low interest rates. And as of September 1 Report good From mortgage data firm Black Knight, 18 million homeowners across the US could save money by refinancing.
FHA refinances can help you reduce your monthly payments, borrow cash or save interest and other costs such as private mortgage insurance. But before you start searching for a lender, you should understand your options and qualify for an FHA refinance.
How does an FHA refinance work?
When you refinance, you apply for a mortgage, use the money to pay off the original loan and then pay the new mortgage over time.
Homeowners with FHA loans can refinance to a new FHA loan or traditional loan, as long as they meet the eligibility requirements. According to mortgage software firm Ellie Mae, in August, 15% of FHA mortgages were refinance loans. Genesis Insight Report.
Within the traditional and FHA categories, homeowners have several refinancing options to choose from:
- Conventional refinance loan Come from private lenders and are not supported by government agencies. Refinancing from an FHA loan to a traditional loan can relieve you of mortgage insurance, as long as you have at least 20% equity in the home and may qualify.
- FHA Stream Refinance Speed up the refinancing process by requiring less paperwork and fewer steps. These refinances are designed to reduce your interest rate and monthly payments, with no cash-back option.
- FHA Cash-Out Refinance Allows you to take a loan that is bigger than you Current mortgage, Pay off the original debt and find the difference. You can use cash for any expense.
- FHA Simple Refinance Allow homeowners to swap their FHA loans for new FHA loans with fixed or adjustable interest rates. There is no cash-out option for this refinance.
- FHA 203 (K) Refinance, Also known as a Rehabilitation Loan, “allows you to buy a fixer-upper and tie the cost of home and home improvements to a loan that saves both time and money,” Chris Pickerell, of Silverton Mortgage Says the regional sales manager.
What are the benefits of refinancing an FHA loan?
Homeowners usually refinance to save money, but there are several reasons for refinancing:
Reduce your monthly payment. If you have paid off some of your mortgage since closing on the home, then refinancing can reduce your monthly payment as the loan is based on a small principal balance. When you refinance, you can increase that balance in more short years than you can reduce your payment on your original loan. If you qualify for a lower interest rate then you will see further monthly savings. If you want to reduce your monthly bill, FHA streamline refinance, FHA simple refinance or traditional loans can help you achieve this goal.
Low payments can help homeowners struggle Consider refusing, Which temporarily suspends or reduces mortgage payments. But borrowers will eventually have to repay those funds.
Nurena Limon, senior vice president of public policy and industry relations at the National Association of Hispanic Real Estate Professionals, says “sometimes more beneficial to the family.” As long as the monthly payment is reduced, it helps them retain homeownership Can help. “
Save on interest. Getting a lower interest rate when refinancing can help you save thousands of dollars in the long term.
Suppose you have a 30-year, $ 200,000 loan with a 4% fixed mortgage rate and a monthly payment of $ 955. Within the same year, you refinance into a new 30-year loan with a 3% interest rate. Your monthly payment drops by $ 112 and adds up to $ 40,184 in interest savings over the life of the loan.
Get rid of mortgage insurance. All FHA loans come with mortgage insurance in the form of a 1.75% upfront fee, plus an annual mortgage insurance premium of 0.45% to 1.05%. By refinancing an FHA loan into a traditional refinance loan, you can get rid of mortgage insurance – as long as you have at least 20% equity in the home.
Pay off your loan soon. If it is important for you to pay off the loan quickly, then Refinance to short term loans Can help Although your monthly payment will increase, because you are paying off the loan within a shorter time frame, you save money and get out of debt sooner.
You can refinance in a short period with either an FHA refinance loan or a conventional loan. But you will first need to find out if you can raise the higher payout.
Change to a different loan type. You can also refinance to a fixed rate loan from an adjustable rate mortgage, or vice versa. With ARM, your interest rate can be low for a certain number of years and then go up or down for the rest of the loan term.
You can protect yourself from future rate hikes by refinancing with a fixed-rate loan. But changing from a fixed rate mortgage to ARM can benefit you if the rates are low and you don’t plan to stay in your home for long.
Tap into home equity. Homeowners can also borrow cash using an FHA cash-out refinance or an FHA 203 (k) refinance loan. Although you will pay eventually Big mortgage balance, You can put additional money into other expenses, such as high-interest loans or home renovations.
“Often, a cash-out refinance is more economical than taking out a personal loan or taking out a loan on a credit card,” says Caroline McCarthy, vice president of sales, On Up, an online shopping broking service. “The rate of interest on cash out-refinances can be significantly lower.”
How can you qualify for an FHA refinance loan?
The eligibility requirements for FHA refinance loans vary depending on the program you choose.
FHA Streamline Refinance: If you have an FHA loan for at least 210 days and have made timely mortgage payments in the last six months, you may qualify for an FHA streamline refinance. These are available for major residences, secondary residences or non-authorized properties approved by the US Department of Housing and Urban Development.
Refinancing should result in a “net tangible benefit” for you, meaning that you shorten the duration of your loan or lower your interest rate – or both. No appraisal is required, which is a benefit if the value of your home has recently dropped.
McCarthy says, “FHA refinance loans are best for borrowers looking to reduce the rate on their current FHA loan, and they don’t believe their home value has gone up too much, or that they would otherwise be able to fund conventional financing.” Are not qualified, ”McCarthy says.
You can choose from two types of streamline refinance: credit-qualifying and noncredit-qualifying. With a credit-qualifying refinance, you will need a credit score of 580 and credit-end Debt-to-income ratio Of 43%. This ratio is your total monthly debt expense compared to your gross monthly income.
The lender will also ensure that you can continue paying the loan. These requirements do not apply to noncredit-qualifying FHA streamline refinances, which use your current loan – not your credit rating and income – to qualify you for the loan.
FHA Cash-Out Refinance: If you have owned the home for at least one year and paid on time, you may qualify for a cash-out refinance at the main residence. You will need at least 20% equity, and lenders will either check your employment documents or utility bills that you are occupying the home. While the FHA requires a minimum credit score of 500, lenders can set their own minimum limits.
But be cautious. Limon recommends being very clear about what that money is going to be used for. “Once you withdraw cash from an asset, it devalues your asset,” she says, allowing homeowners to use cash for emergencies or as a way to grow their wealth. needed.
FHA Simple Refinance: The house in which you are refinancing must be your principal residence or HUD-approved secondary residence to qualify for a simple refinance. The lender will order an appraisal and verify that you have made timely payments in the last six months.
“A simple FHA refinance loan is a good match for borrowers who believe that their home value has increased recently,” McCarthy says, “or they can make upfront charges by rolling out closing fees and prepaid / escrow items to the loan. Want to reduce fees. “
FHA 203 (K) Refinance: FHA offers two types of FHA 203 (k) refinance loans: Limited 203 (k) and Standard 203 (k). The standard option has a minimum loan amount of $ 5,000, and you must work with a participating lender and a licensed general contractor.
Your home should also meet certain energy-efficiency and structural standards. The limited loan option allows you to borrow up to $ 35,000 with a minimum cost requirement. Pickrell says that buyers with older homes need repairs who want to consider this loan.
How can you decide if a FHA loan creates the feeling of reviving?
If you can cut your interest rate by at least 0.5% to 0.75%, then refinancing may make sense.
Pickrell says “this can be a good trick” if you are looking for a small mortgage term, want to do home improvements or have cash money for big expenses.
Ask yourself the question whether refinancing is right for you:
What are my financial goals? Think about what you want to achieve and which Refinance program Will best suit your needs.
If your home value has increased recently and your credit score is higher than when you took out your FHA loan, then refinancing into a traditional loan can help you get rid of mortgage interest costs. Alternatively, you may want to withdraw cash through an FHA cash-out refinance.
But if the value of your home has decreased recently and you are looking to save money on your mortgage payments, then an FHA streamline refinance can be a good option. No evaluation is required, and the program is intended to save homeowners and time.
Will I qualify for a refinance loan? Depending on the loan program, lenders can check your credit score, debt-to-income ratio and employment status. Borrow with High credit score And low debt-to-income ratios are generally seen as low-risk – and some lenders have adopted stringent standards during the coronovirus epidemic.
Among borrowers approved for FHA refinance loans in August 2020, the average FICO credit score was 678 and the DTI ratio 42% according to Eli Mae.
“Right now all borrowers, not just FHA borrowers, will need a better credit score and lower debt before the epidemic,” says Karen Solgaard, a loan consultant with New American Funding. “Lenders are forcibly staring requests and possible predictions.”
Refinancing can help you reduce costs or find a better type of loan for your situation, Pickrell says, but “talk to a mortgage professional for which refinancing option is right for you”. “If you fall short of qualifications, a mortgage professional can also help you figure out what actions you can take to improve your qualifications in the future.”