Government Loan Refinance Rules
The rules are a little different if you have a governmentbacked mortgage. This includes FHA, USDA, and VA loans.
With a government loan, you have the benefit of being able to use a Streamline refinance. Streamline refinancing such as the FHA Streamline Refinance or VA IRRRL program cuts down the time and paperwork associated with a refi so you can get a lower rate faster.
However, you have to wait six to seven months before using a Streamline refinance to replace your original mortgage. And you must have a recent history of ontime mortgage payments.
Understanding Fha Loan Mortgage Insurance
FHA borrowers have to pay two types of FHA mortgage insurance to protect FHA-approved lenders from the financial risk of defaults. The first is an upfront mortgage insurance premium of 1.75% of your loan amount, which is charged at closing and typically added to your mortgage balance.
The second is an ongoing annual mortgage insurance premium that ranges from 0.45% to 1.05%, depending on your down payment and loan term. Its charged annually, divided by 12 and then added to your monthly payment. Heres an example of how much FHA mortgage insurance youd pay on a $300,000 loan amount assuming you make a 3.5% with an annual MIP charge of 0.85%.
FHA UFMIP calculation:
- Convert 1.75% to the decimal
- Multiply by the loan amount: 0.0175% x $300,000 = $5,250 FHA UFMIP premium added to your loan amount
- Convert 0.85% to a decimal
- Multiply by the loan amount 0.0085% x $300,000 = $2,550
- $2,550 divided by 12 = $212.50 monthly MIP charge added to your monthly payment
There are some important differences between FHA mortgage insurance and conventional private mortgage insurance :
Youll typically pay FHA MIP for the life of your loan. This is true if you make a minimum FHA 3.5% down payment. However, if you can make at least a 10% down payment, MIP drops off after 11 years. You can get rid of conventional PMI once you can prove you have 20% equity.
Rules For Refinancing Usda Loans
The U.S. Department of Agriculture offers two mortgage programs for rural home buyers: guaranteed loans and direct loans. To refinance a guaranteed loan, you must have had the mortgage for at least 12 months. For direct loans, there is no waiting period for refinancing.
The USDA offers three options for refinancing into another USDA loan. If you get a streamlined refinance or non-streamlined refinance, you must have made on-time payments in the last 180 days. For the streamlined assist program, you must have been current on your mortgage payments in the last 12 months.
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How Old Is My Current Mortgage
If you’re well into your current mortgage, evaluate how many years of mortgage payments refinancing will add. It doesn’t make good financial sense to begin a 15-, 20-, or 30-year mortgage if you only have 10 years left on your current loan. In the long run, you could end up paying thousands more in interest if you refinance, even if the interest rate and monthly payment are lower.
Plus, you pay primarily interest for the first few years of a mortgage. The same applies to a refinanced mortgage. So instead of making headway on principal like you have been, you’ll be back to nearly interest-only payments.
Factoring In The Costs
Once you know what the costs of refinancing are, its a matter of just doing the math. If youre doing a rate/term refinance with the goal of lowering your payment, simply divide your cost to close the loan by the amount youre going to save every month.
This will tell you the amount of time to stay in the house in order to break even on the deal. If you see yourself moving before you reach breakeven, refinancing may not be a great option.
As an example, if refinancing lowers your interest rate and saves you $50 per month on your payment, but it has $5,000 in closing costs, you would need to stay in the home 100 months a little over 8 years to break even. If you were to move out before that point, refinancing isnt right for you under the terms of that deal. Its a matter of balancing the cost against both your plans for the refinance and your long-term goals.
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What Causes The Longest Delays On A Refi
Some steps in the refi journey are much longer than others, consistently taking a week or more to complete. Although a number of different issues could cause delays, these are the most likely slowdowns youll encounter:
- Appraisal: Your lender will want to check the market value of your home before deciding on the terms of your refi. Scheduling, completing and documenting a refinance appraisal can take upwards of two weeks. During the height of the COVID-19 pandemic, these timelines were even longer.
- Title search: Due diligence dictates that lenders check to ensure the title is clear and free of any additional ownership claims, even when working with your existing mortgage provider. Just like with an appraisal report, you may be waiting a week or two possibly even longer for the title search to finish.
- Miscommunication: On a well-run mortgage lending team, every person understands the role they play and when they need to act. Communication breakdowns like, say, neglecting to ask for required documents or forgetting to upload a completed appraisal report often lead to unnecessary delays.
- Incomplete documents: Failing to provide the necessary documentation, such as financial records, proof of employment and tax returns, will stop the refi process in its tracks. Unlike other issues weve discussed, this one usually falls squarely on your shoulders as the borrower.
What Can Delay The Refinancing Process
Being aware of what can hold up the refinancing process for you can help you plan and avoid any pitfalls. Some of the common factors that might make the refinancing process longer for you include:
Making errors in your refinancing application
Forgetting to submit all your necessary documentation
Your lender might request additional documentation than what was originally anticipated
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When Is A Refinance Worth It
Whats most important to focus on is, what are the monthly and lifetime savings of the loan? What are the costs? And how long will it take you to recover those costs with the savings youll earn? says Ralph DiBugnara, president of Home Qualified.
Gay Cororaton, Senior Economist for the National Association of Realtors, says best candidates for refinancing are:
- Those with high mortgage rates relative to a new lower rate
- Those who intend to stay for a long time in their home
- Those who have the cash ready to pay for closing costs
Alternatively, many lenders can roll the closing costs into your mortgage principal or cover them in the form of a higher interest rate so you dont have to pay upfront.
That higher interest rate may still be far below your current rate, and it comes with no closing costs from your pocket or added to the loan balance.
Dropping your rate with no associated costs makesthe decision to refinance an easy one.
How Does A Mortgage Refinance Work
All refinance loans have one thing in common: They replace your existing mortgage with a new one. When you close on the new loan, your current mortgage gets paid off, and you start making payments on the new loan.
You may receive mailers that claim you can reduce your rate instantly or even reduce the rate on your existing loan. Typically, these are just offers to replace your existing loan with another one.
Whatever the offer, the new mortgage should improve your situation. What can a new mortgage offer than your current one cant? That depends on the type of refinance youre getting.
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Refinancing To A Conventional Loan
The biggest perk to choosing a conventional refinance over an FHA one is that you can avoid mortgage insurance entirely. FHA loans come with mortgage insurance premiums anywhere from 11 years to the entire loan term. With conventional loans, theres no insurance required as long as you own at least 20% of the home.
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.
How Soon Can You Refinance A Va Loan
VA loans are backed by the federal government in the form of the Department of Veterans Affairs. These loans provide unique privileges.
But they still have rules about refinancing: You have to have had your current loan for seven months before you can refinance or re-refinance. And the VAs streamline option is almost always the one to go for unless you want to take cash out.
Benefits Of Refinancing An Fha Loan To A Conventional Loan
One of the main advantages of refinancing from an FHA loan to a conventional loan is the ability to eliminate FHA mortgage insurance premiums .
With a conventional loan, once your balance reaches 80 percent of your homes original value, you can cancel private mortgage insurance . This option doesnt exist in most cases for FHA loans, so youll continue to pay premiums unless you refinance to another type of loan.
If you refinance your FHA loan to a conventional loan and still have to pay mortgage insurance due to your equity level, you may find that the premium costs more now than what it cost for your FHA loan. Refinancing, however, may have lowered your monthly payments enough to compensate, and the tradeoff is that youll be able to cancel PMI, eventually, on the conventional loan.
- Conventional PMI: 0.58 percent to 1.85 percent, according to averages from the Urban Institute
- FHA MIP: 0.75 percent upfront and 0.45 percent to 1.05 percent yearly
Another benefit to refinancing your FHA loan to a conventional loan is that conventional mortgages allow you to tap up to 80 percent of your homes equity through a cash-out refinance without paying mortgage insurance. Conventional loans also have higher loan limits, so you can take out a larger amount compared to an FHA loan.
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How Long Does Closing On A Refinance Take
As you may have already suspected, refinancing an existing mortgage can take roughly the same amount of time as closing a loan on a new house. You should expect it to take between 30 days and 45 days to refi from start to finish, although there are some cases where borrowers are cleared to close in even less time.*
On the other side of the spectrum, a typical refi could take up to 60 days to complete, depending on a host of factors like your lenders capacity to juggle a high loan volume. Worst-case scenario, you may be looking at several months to close on a refinance, but that would involve several extenuating and pretty unusual circumstances. For instance, complications arising from the COVID-19 crisis in 2020 often delayed the refinance timeline.
Using A New Appraisal
If youre looking to use a new home appraisal to prove an increase in your equity thats based on increased property value, there are special waiting periods involved depending on the type of loan you have.
If you have an FHA, a jumbo or a VA loan and you want a new appraisal to determine a value increase, you have to own the property a year before requesting the appraisal.
On agency loans from Fannie Mae or Freddie Mac, there is no specific timeframe in which you have to wait. The appraisal just has to be supported by changing market conditions and/or documented improvements made to the property.
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Are Refinance Rates Going Down
While current mortgage rates remain low, most mortgage experts anticipate rates will drift higher over the coming months and years. The Federal Reserve is expected to begin raising short term interest rates in 2022. The Fed does not set mortgage rates, but lenders tend to increase the price to borrow money when the Fed acts.
Do I Have To Pay Closing Costs On A Fha Streamline Refinance
The borrower pays closing costs on an FHA Streamline Refinance. Unlike other types of refinances, you cannot roll these costs into your loan amount. FHA Streamline closing costs are typically the same as other mortgages: 2 to 5 percent of the mortgage amount, which would equal $3,000 to $7,500 on a $150,000 loan.
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How Fast Can You Refinance A Home Loan
The time it takes to refinance can vary between individuals and lenders. If you’re lucky, you may be able to refinance in as little as a week but it can take much longer.
If speed is a priority for you, we recommend speaking to a mortgage broker or Home Loan Specialist. They’ll have more insight into which lenders tend to process loan applications quickly and which ones might be slower.
It’s also a good idea to use an online mortgage platform to compare and apply for home loans all in one place. This can be faster than going up to your local bank branch for a refinance.
Here are some documents to have ready to speed up the refinancing process:
- Personal identification
- Recent tax returns
- Details of other assets
- Details of any liabilities
Unfortunately, the speed at which your home loan application is processed is not something you can control. Even the most perfect applications can be delayed if a lender decides it wants to see more details of your expenses, for example.
Try to give yourself plenty of time to refinance to avoid stress and the risk of accidentally making errors.
Your Needs May Outweigh The Costs
Of course, your needs may outweigh your answers to the above questions and justify refinancing your mortgage. After all, you may need a lower monthly payment or to get out of an adjustable rate mortgage before it readjusts, or want to consolidate high-interest debt, make home improvements, or pay for education or medical expenses.
The information in this article was obtained from various sources not associated with State FarmÂ® . While we believe it to be reliable and accurate, we do not warrant the accuracy or reliability of the information. State Farm is not responsible for, and does not endorse or approve, either implicitly or explicitly, the content of any third party sites that might be hyperlinked from this page. The information is not intended to replace manuals, instructions or information provided by a manufacturer or the advice of a qualified professional, or to affect coverage under any applicable insurance policy. These suggestions are not a complete list of every loss control measure. State Farm makes no guarantees of results from use of this information.
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Can I Refinance With The Same Bank
The short answer is yes, though it might not be the best option. Refinancing with your current mortgage lender has some advantages: They already have your information on file, and they may offer you a good deal to stick with them. On the other hand, if youre looking for the very best possible deal, then its worth shopping around.
Can I Refinance My Fixed Rate Home Loan
You can refinance a home loan with a fixed interest rate, but you may face penalty fees. Unlike a variable rate home loan which offers the flexibility to make extra repayments and refinance penalty-free , a fixed rate mortgage offers stability and security.
When you get a fixed interest rate, you agree to that interest rate for a period of time between 1 and 5 years. Itâs possible to âbreakâ this fixed rate term by making additional repayments above the permitted cap or by refinancing.
To make up for the financial loss they will incur by you refinancing your fixed rate, your lender will likely charge break costs. Before you refinance, ask your lender to find out what break costs you could be charged. Then, work out whether refinancing at this time is worth it.
Sometimes, it may make more sense to wait until your fixed period ends before switching to a new loan.
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You Want To Convert From An Adjustable Rate To Fixed
If mortgage rates are increasing and you currently have an ARM or adjustable rate-mortgage you may want to consider refinancing and converting to a fixed-rate mortgage. Thats because with an ARM, your rate may increase beyond what youd pay with a fixed-rate mortgage. If youre concerned over future interest rate hikes, a fixed-rate mortgage could provide some peace of mind.
Engaging The Services Of A Broker
It is highly recommended to use a mortgage broker who can suggest a suitable lender for refinancing your mortgage. You need to quickly settle the terms of engagement with the broker so that you can initiate the refinance process as soon as possible.
When you first consult with a broker about your refinance options, it is important that you have your priorities straight. Instead of focusing on rates, fees and other financial details, hone in on what a broker can offer you when it comes to providing the best service possible and the terms of the loan. Many borrowers get fixated on the interest rate, particularly in the rising interest rate environment we currently find ourselves, and neglect to understand the terms of a loan.
Its easy to pick out the lowest rate on the market for a loan, but what about penalties, fees, home equity options, amortization, and other factors? A professional mortgage advisor will walk through all these intricacies with you so that you are equipped to make the best decision possible based on your situation.
Working with a broker gives you the opportunity to gain professional insight about mortgage refinancing, so take advantage of it. Ask your broker about any questions that you have. The more you understand about refinancing, the better able you will be to navigate the process efficiently.
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