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When to Refinance FHA Loan
If you’ve been faithfully paying off your mortgage and making improvements to your home year after year, the additional equity might come in handy one day when you need to do Federal Housing Administration (FHA) refinancing.
If you have an FHA loan, you should be eligible for a FHA refinance. The benefits of applying for this type of new mortgage is you can pay off your existing loan, and replace it with a new one which has better terms and lower interest rates. See, all that hard work put into fixing up your house came in handy after all.
As long as the property in question is your primary residence, all you have to do is figure out what type of refinancing is best for you and to find an FHA approved expert in your area.
FHA Streamline and FHA Cash-Out Loans
The FHA refinance program is categorized into two: streamline refinance and cash out refinance. Knowing the main differences between the two might help you determine which one is best for you.
The FHA Streamline refinance
Under this option, your mortgage loan will be refinanced to a lower interest rate quickly, but you won’t get any cash during, or after, the process. The main benefit of choosing this type of refinance is that the approval time is quicker and it has more relaxed qualifications. Usually, you do not have to verify your income, fill out tons of paperwork, and it does not always require an appraisal.
Are FHA streamline refinance a good idea?
With streamline refinancing, you will be able to lower your interest rate and re-negotiate your terms at the same time. Do keep in mind though that there are closing costs associated with the new mortgage.
Make sure you work with a trusted FHA-approved lender, like HomeRate Mortgage, that is able to offer you the best deals so that your savings outweigh your cost.
The FHA Cash Out Refinance
The other alternative to a streamline refinance is a FHA cash out refinance. Under this type of refi, you will get a new mortgage loan that, is bigger than your current one. You will first use this new loan to pay off your outstanding mortgage balance and then spend the extra cash on whatever you want.
One drawback of the cash out refinance is that it comes with more paperwork.
Can FHA Loans Be Refinanced Under HARP?
In the unpredictable real estate world, you never know when the market might underperform and devalue your home. If that happens, you should consider the Home Affordable Refinance Program (popularly known as HARP) to refinance your current mortgage without having to pay for new mortgage insurance.
This allows you to change your higher interest rates to lower, more favorable ones.
It is possible to refinance your FHA loan under HARP, but there are two main conditions that you must meet.
- First of all, your FHA loan must be an underwater mortgage, meaning that your loan is more than the market value of your home. This means, if you were to sell your home now, you would lose money.
- Rather than paying the loss from your pocket, you can refinance under HARP and reduce the value of the loan.
- Secondly, you must have taken your loan out after May 31st, 2009. This is the date the HARP program started. Unfortunately, any mortgage loan taken before this date is not eligible to be refinanced under this program.
When to Refinance FHA Mortgage
So we have established that FHA refinancing is a good idea, but when should you do it? Just like other loans, timing is very important with a FHA refinancing because you want to make sure you’re getting the best interest rate and lowest mortgage payment.
Do you think it is the right time to do an FHA mortgage refinancing? Here are some key pointers:
- When interest rates are low: you should always borrow when rates are low. The Federal Reserve regulates financial institutions, thus influencing the country’s interest rates. If you keep an eye on trends and follow experts’ opinions, you can predict when mortgage interest rates are likely to fall.
- When your home’s value has increased: while an appraisal is not a necessity, the lender you work with might decide to do it anyway before granting you a refinance. If you have made significant repairs and improvements, they might increase the value of your home, which puts you in a position to get a bigger loan. This is especially good if you’re planning to apply for the cash out option.
- When mortgage insurance is low: the Federal Housing Administration sets mortgage insurance premium rates depending on the state of the market and economy. If you want to refinance, wait until the FHA decreases mortgage insurance rates. That will not only lower your monthly payments but might also decrease the burden on the overall loan.
If you time your FHA refinancing well, you will save a lot of money both in the short (monthly payments) and long terms (overall loan amount). If you’re not sure what to look for or how to track interest rates, take to a mortgage specialist who will be able to help you determine when the best time for your refinance will be.
FHA Streamline Refinance vs. Conventional Loans
When compared to conventional loans, FHA refinance rules are not usually very strict, particularly if you are dealing with FHA Streamline refinance. For instance, it doesn’t have stringent down payment requirements, which makes its perfect for first time home buyers. On the downside, the FHA usually requires that borrowers pay a one-time upfront insurance premium that is 1.75% of the total loan value. That is a necessity that doesn’t come with conventional loans.
Another difference is that while both types of loans have costs, conventional loans fees are generally higher. It is important to keep in mind that if a lender offers FHA streamline refinance at ‘no cost,’ they might compensate in offering increased interest rates.
Which is right for you?
In summary, an FHA streamline refinance has better terms than a conventional loan, but you should also consider other factors like repayment period and your amount of equity. These factors can reduce your total repayment amount of a conventional loan dramatically, possibly making it a good choice.