Should You Refinance Your FHA Mortgage Loan?

FHA loans -150x150Federal Housing Administration (FHA) mortgage loans are a great choice for someone with a lower credit score, who is also looking for a loan with a lower down payment and closing costs. FHA loans are insured against default by the Federal Housing Administration, therefore allowing lenders to give out large mortgage loans. With down payments as low as 3.5 percent of the property price, an FHA mortgage loan can be a great choice when buying your first home. Also, FHA loans can be used if you need money to make repairs or improvements on your home, or if you buy a property that needs repairing.

Only available to homeowners who use their home as a primary residence, refinancing an FHA loan is a great way to save money. Because interest rates will be lower, refinancing an FHA loan will allow you to reduce your monthly payments. You will also have the option of reducing the mortgage loan term, from 30 years to 15 years, which will build home equity in your property faster.

FHA Mortgage Loan Refinancing Options

Refinancing an FHA mortgage loan is usually done through the FHA’s Streamline Refinance program, which can only be used when refinancing an FHA insured loan. This program allows you to refinance your FHA mortgage loan without getting a new home appraisal, with the condition that the new loan amount is the same or lower than the old loan amount. For refinancing a conventional loan to FHA, you will have to take the regular FHA refinance route. FHA’s Streamline Refinance program’s requirements are that the original mortgage loan must be FHA insured and in a good standing, you must have been the owner of the property for at least six months, and you must use an FHA approved lender. The refinance must result in a decrease of the principal and interest rate.

An option that is available for both homeowners with FHA and non-FHA mortgage loans is the FHA Secure Refinance program. This type of refinancing allows homeowners who are not keeping up with their adjustable rate mortgage payments to refinance into an FHA fixed rate mortgage.

When refinancing an FHA mortgage loan, you also have a cash-out option, which allows you to take out a larger loan than you currently owe and receive the difference as cash. The new loan can be as high as 96.5 percent of the property’s value.

Pros of Refinancing an FHA Mortgage Loan

Choosing to refinance an FHA mortgage loan can be beneficial to your financial situation. The process is easier than refinancing a conventional mortgage loan and, done at the right time, can help you save money. Here are some of the pros to refinancing an FHA mortgage loan:

  • An appraisal is not required. On a conventional loan, your home needs to be appraised when refinancing, in order for the lender to make sure that the property value is larger than the loan amount. When refinancing an FHA loan, the original appraisal is used, meaning that you can refinance even if your home’s value has decreased. You also save a few hundred dollars, which is what an appraisal would cost.
  • Your monthly payment will be lower. Because your interest rate will decrease when refinancing an FHA mortgage loan, your monthly payment will also be lower. Changing your loan from a 30 year to a 15 year term will also lower your interest rate.
  • Monthly income documentation is not required. While lenders will still verify that you are working, proof of your monthly income is not required. Because your mortgage is already insured by the Federal Housing Administration, your income will not be relevant.
  • Higher approval rate. The approval rate for FHA loans is much higher that the approval rate for conventional loans. This way, more people can own a home than with any other kind of mortgage refinance program.

Cons of Refinancing an FHA Mortgage Loan

While there are some clear advantages to refinancing an FHA mortgage loan, there are also some important drawbacks that you should take into consideration before deciding to refinance:

  • FHA mortgage insurance. When taking out an FHA mortgage loan, you will have to pay mortgage insurance for at least 5 years. After refinancing an FHA loan, the 5 year mortgage insurance requirement starts over.
  • Higher interest rates for people with good credit score. While FHA mortgage loans are very attractive for someone with a less than perfect credit score, they are not ideal for people with good credit scores. A conventional mortgage loan would be a better choice for someone with a spotless credit report.
  • Fees and closing costs. Between the transaction fee that you have to pay your lender, the recording and administration fees, you could be looking at a bill that can reach several thousand dollars. You will need to have a pretty important drop in your interest rate if you are going to justify the fees and closing cost.

When considering refinancing your FHA mortgage loan, it is very important to understand all the pros and cons. It may seem like an attractive option, but you need to exercise caution and document yourself as much as possible before making a decision.

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