Refinance Even If You Owe More Than Your Home Is Worth
Unlike many mortgage refi options, an FHA Streamline allows you to refinance even if you have an underwater mortgage, or you owe more on your home than its worth.
The loan amount for your FHA Streamline is primarily determined by the outstanding principal balance of your loan so if your home value has declined, you may still be able to use an FHA Streamline to refinance.
What Is An Fha Cash
A cash-out refinance is a way for homeowners to both refinance their mortgage loan and pocket a lump sum payment of cash at the end of the process. Owners do this by refinancing into a loan that is larger than what they owe on their current mortgage.
Say you owe $150,000 on your existing mortgage. You might refinance to a new mortgage loan worth $200,000, paying $4,500 in closing costs to do so. Youd then take $45,500 in a lump sum payment, the difference between the $150,000 you owe and your new $200,000 mortgage minus your $4,500 in closing costs.
You can use that money for anything, whether you want to build a main bedroom suite, pay off high-interest-rate credit card debt or pay for a childs college tuition.
The difference between a traditional cash-out refinance and an FHA cash-out refinance is that your new mortgage will be insured by the Federal Housing Administration. FHA loans typically allow lower credit scores and come with lower interest rates. On the negative side, you will have to pay mortgage insurance for 11 years. Youll have to determine, then, if the positives of an FHA cash-out refinance outweigh the negatives.
In good news, though, you dont need to be currently paying off an FHA loan to apply for an FHA cash-out refinance. Unlike an FHA Streamline refinance, which requires less paperwork, you can apply for an FHA cash-out refinance even if you are currently paying off a conventional mortgage loan, one not insured by any government agency.
How Soon Can You Refinance A Mortgage Know The Waiting Periods
Mortgage Q& A: How soon can I refinance my mortgage?
With mortgage rates marching toward new all-time lows again, a lot of recent home buyers are probably asking this question, even those who just closed on their mortgage weeks ago.
After all, if your mortgage interest rate is a half-point or more above todays new low levels, you might be leaving a considerable amount of money on the table.
And because you havent yet made a dent in your mortgage, theres no fear of resetting the clock and starting all over.
There are of course closing costs to think about, including those you may have paid on your previous mortgage such as discount points, along with third-party costs like title insurance and appraisal fees, and so on.
But it could be a smart move to grab a new mortgage while rates are low, even if yours is still in its infancy.
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Fha Refinance Vs Conventional
Both FHA and conventional mortgage refinances come with their own benefits and eligibility requirements. Generally, refinancing to a conventional loan will come with stricter , equity, and documentation standards, but it also holds potentially more benefits for the right homeowner.
Make Sure You Qualify
You should have a clear picture of what you want out of your refinance before you apply. Do you want to change your term? Lower your interest rate? Convert your existing equity to cash?
First, establish a financial goal before you start comparing mortgage lenders. This step will allow you to quickly see if you qualify for a refinance with each lender on your list.
Some of the factors lenders consider when you apply for a refinance include:
- Your credit score: Just like when you apply for a home purchase, you must meet credit standards before you can refinance your loan. Check your credit score and make sure you have a FICO®Score of at least 620 to refinance into a conventional loan.
- Your home equity: Your home equity is particularly important if you want to take a cash-out refinance. Most lenders wont loan you more than 80 90% of the equity you own. This restriction means that you can only refinance $8,000 to $9,000 for every $10,000 worth of equity you have in your property. Contact your current lender or loan officer and request a mortgage statement if you arent sure how much equity you have.
Remember, going through a refinance means you must pay closing costs again. Keep in mind that you might lose any financial benefit youd get through a refinance if you moved into your home within the last year. If youre a Rocket Mortgage® client, well periodically do a mortgage review to make sure that your current mortgage is the one that best supports your goals.
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Is It Worth Re
When home mortgage rates are low, as they are now, refinancing can assist you to not just eliminate PMI, however lower your month-to-month interest payments. Its a double dosage of cost savings. The refinancing method works if your house has actually acquired considerable worth given that the last time you got a home loan.
Can I Afford Refinancing Closing Costs And Fees
Refinancing can be pricey â oftentimes thousands of dollars. However, borrowers can typically use a rebate from the lender to offset some of the costs or finance the costs and fees. To understand how financing these fees will impact your monthly payment, be sure to use our handy calculator found here.
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What To Consider Before Refinancing
Nowadays, almost no mortgages come with prepayment penalties but some older ones may. Check your loan agreement or ask your lender about them.
Prepayment penalties are fines you have to pay for paying down your mortgage early, which youll do if you refinance. If youre unlucky enough to be liable for them, it will change your cost-benefit analysis.
What Is An Fha Loan
The Federal Housing Administration Loan is a mortgage insured by the Federal Government so that lenders can provide single family mortgages with flexible credit qualifying requirements and loan terms such as low-down payment, low interest rates and low closing costs. Since 1934, the FHA has been helping people become successful homeowners, and FHA mortgages are as popular as ever with homeowners and first-time homebuyers.
The FHA also offers great refinancing options, whether youre an existing FHA borrower or not. If youre thinking about a refi, an FHA refinance might be right for you. Check out these FHA refinance options and how you may qualify for each.
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Eliminate Mortgage Insurance Premiums
Conventional mortgages let you stop paying for mortgage insurance when your mortgage balance falls below 80% of your homes market value. For some, that happens quickly because they live in areas where home prices are rising fast.
But government-backed loans from the FHA and USDA dont let you do that. Youre on the hook for mortgage insurance premiums throughout the life of your loan. Well, nearly always: If you initially make a 10% down payment on your FHA loan, you can stop paying MIPs after 11 years.
But most borrowers with this type of mortgage have to keep paying until they sell the home or finish paying off their loan. Unless they refinance to a different sort of mortgage.
And thats why so many of those with FHA and USDA loans refinance to conventional loans as soon as their mortgage balances reach 80% of their homes values. With MIP costing 0.85% annually of the mortgage value on FHA loans and 0.35% for USDA loans, they get to save a small fortune.
Bottom Line: After The Hassle Of Buying A Home Does Refinancing Make Sense
In general, you should consider refinancing if youre able to obtain a lower interest rate, you have sufficient equity in your home and you know you will stay in your home for several years. It doesnt make sense to refinance and pay the closing costs if youre just going to sell it a year down the line.
The first step if youre considering a refinance is to talk to a lender. Most lenders will give you basic information about your proposed refinance before you even submit extensive documentation or undergo a credit check. If you decide to move forward, the lender will then review your income, credit history and DTI ratio, as well as determine the LTV ratio on your home to see how much equity you have.
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As a member of the ConsumerAffairs Research Team, Kathryn Parkman believes everyone deserves easy access to accurate and comprehensive information on products and businesses before they make a purchase, which is why she spends hours researching companies and industries for ConsumerAffairs. She believes conscious consumption is everyoneâs responsibility and that all content deserves integrity.
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What Is A Usda Loan
A USDA home loan is a residential mortgage guaranteed by the U.S. Department of Agriculture. USDA loans are designed for low- to moderate-income families who may not otherwise qualify for conventional mortgage financing.
USDA loans emerged in 1991 as part of the Single Family Housing Guaranteed Loan program, an initiative that sought to incentivize the development of rural, low-density areas. The program is now a popular option among cash-strapped borrowers with less-than-perfect credit.
Why are USDA mortgages so popular? Because unlike conventional loans, which typically require a down payment of 20% or more, USDA loans dont require any money down. Yup, you heard that right. Zilch. Zip. Nada. Of course, youll still be expected to pay closing costs as well as guarantee fees. These fees are like private mortgage insurance, or PMI, and protect the lender in the case of default.
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You Want To Tap Your Home Equity
If youve built up a significant amount of equity in your home and want to access a chunk of those funds to make home improvements, buy an investment property or consolidate high-interest debt, a cash-out refinance may be worth thinking about.
A cash-out refinance comes with a larger loan amount than your existing mortgage, so expect to pay higher upfront costs and potentially more in interest over your loan term.
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The Benefits Of Simple Refinancing
FHA Simple Refinance is a straight-forward process. You can add closing costs and prepaid costs into the loan, as long as it doesn’t make the loan more than 97.75% of the home’s value based on a current appraisal. This makes the option good for people who don’t want to pay closing costs out of pocket.
You can also remove co-borrowers from the original mortgage if they are no longer needed, or if personal circumstances make it best to remove them.
How Soon Can You Refinance An Fha Loan To A Conventional Loan
You can refinance your FHA mortgage into a conventional loan as soon as you can meet the qualifying requirements for your new loan. There are no waiting periods, often referred to as “seasoning” requirements, for this type of transaction.
Other mortgage refinances may have waiting periods. In most cases, youll have to wait six months before you can qualify for a cash-out refinance. To complete an FHA Streamline Refinance, you must wait 210 days and make at least six on-time payments in that period.
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Check Your Credit Score
Your credit score is a major factor in whether you qualify for a refinance loan and the interest rate youre offered. People with higher scores typically have an easier time getting a loan and pay lower rates. You can request a free copy of your credit report from each of the three major credit bureaus Equifax, Experian, and TransUnion once per year using AnnualCreditReport.com.
When you receive your report, look carefully for any errors like incorrect balances, or accounts listed as past due that are actually current. If you find a mistake, you can dispute the information with the credit bureau that issued the report and have it corrected. This may boost your score.
How Often Can You Refinance Your Mortgage
There are no concrete rules on how often you can refinance your mortgage however, because theres a cost to refinance, its wise to refinance only when its financially beneficial to do so. Keep your break-even point top of mind each time you consider a mortgage refi.
Refinance closing costs can range from 2% to 6% of your loan amount, and it can take at least a few years to recoup those costs. Theres also a new adverse market refinance fee, which equals 0.5% of the loan amount, going into effect Dec. 1, 2020, for most conventional loans.
You might opt for a no-closing-cost refinance to avoid paying out of pocket at closing. Instead, your lender will either charge a higher interest rate or increase your loan amount to cover whats owed.
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What Is The Fha Cash Out Max Ltv
The maximum LTV for an FHA cash out refinance is 80% of the appraised value of the home. Your lender will require a full appraisal before issuing a final approval. At that time, your loan amount can be adjusted to meet the maximum 80% LTV requirement
What Can the FHA Cash Out Refinance Funds be Used For?
The FHA does not restrict what the cash out funds can be used for. However, these are the typical reasons why homeowners opt for a FHA cash out refinance:
- To make home improvements
In the end, you can use the funds for anything you want.
Pros Of Refinancing From An Fha Loan To A Conventional Loan
Refinancing may be worthwhile for the following reasons:
May lower your interest rate
If your credit score has improved and you can qualify for a conventional loan, you may be able to refinance to a lower rate saving you thousands of dollars in interest payments over the life of your loan. Lower interest rates also typically mean lower monthly payments.
Ability to drop mortgage insurance
Most FHA loans require you to pay an annual mortgage insurance premium for as long as you have the loan. Generally, you can only cancel your premium if you make more than a 10% down payment on an FHA loan and then only after 11 years of payments.
With conventional loans, youll usually need to pay for private mortgage insurance if you make less than a 20% down payment. But canceling PMI is a lot more straightforward. When you reach 20% equity in your home, through a combination of monthly payments and home price appreciation, you can ask your lender to cancel your private mortgage insurance or refinance into a new loan without PMI.
As youre refinancing your FHA loan to a conventional loan, try to avoid mortgage insurance entirely so that you can save money on your monthly payments.
Loan limits are higher
However, the loan limit on most conventional loans is $647,200 . Your home may fall within that limit, making a conventional loan a feasible option.
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What Fees Will You Pay
loanDepot is not transparent with the fees it charges on its loans. Like with rates, youâll need to contact the lender to see what rates might apply. Potential fees might include charges for underwriting, loan processing and required appraisals.
Keep in mind that if youâve already taken out a mortgage with loanDepot, youâre eligible for its Lifetime Guarantee. Through this program, the company will reimburse your appraisal fee and waive its lender fees if you opt to refinance your mortgage with them.
When Should You Refinance Your Fha Loan
Another question you should ask yourself is when you should refinance your FHA loan. Just because you can refinance it after six months, does it make sense to do so?
Something to keep in mind is the cost of the refinance. Every loan costs money unless you negotiate a no-closing-cost loan. If you do that, though, the lender will charge you a higher interest rate, so the savings may not be as great.
Refinancing your loan after just six months gives you very little time to build up equity in the home. The only time it may make sense to refinance early like that is if interest rates drop significantly and you can use the FHA streamline program. Because the FHA streamline program doesnt require verification of your income, assets, credit score, or home value, there are fewer costs involved and its easier to get approved.
A good tool to use to determine if it makes sense to refinance is the break-even point. You can figure it out using the following formula:
Total closing costs/Monthly savings = Months to break-even
Typically, 36 months to break-even is the maximum you should allow. This means that it will take you up to 3 years to recoup the closing costs that you paid and start reaping the savings of the new mortgage. Even if you use the cash-out refinance option, you want to know the break-even point to ensure that it makes sense to tap into your homes equity.
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