Types Of Fha Refinance Loans And Why To Refinance
Knowing you have the option to refinance an FHA loan, you may wonder if now is the right time. These are common reasons homeowners choose to refinance an FHA loan:
- Mortgage rates dropped recently
- The value of your home has gone up
- You may need the extra cash
- You would like to switch over to a conventional loan
- You could save money in the long run
The one you choose will ultimately depend on your goal and why you are looking into refinancing your home.
If your primary purpose is to lower your current monthly payments or to shorten your loan term, then FHA Streamline may be the better option. If you need the extra cash, an FHA Cash-Out would be a reasonable choice.
Making A Plan To Get Rid Of Fha Mortgage Insurance Is A Great Financial Decision
When youre youre making a home purchase, youre mainly focused on getting into a place where you can set down roots and build a solid future. The down payment can be a big hurdle so high FHA PMI costs can be a worthwhile trade-off.
But now youre settled in, its time to think about getting rid of FHA mortgage insurance. These high monthly PMI payment costs could and should be going into savings, a childs college fund, or toward loan principal.
Dont delay. Even if youre not able to cancel your mortgage insurance now, make a plan for how youre going to do it.
Ten or twenty years down the road, youll be glad you did.
Fha Loans Vs Conventional Loans
Unlike an FHA loan, a conventional loan isnt backed by the government and requires private mortgage insurance to protect the lender when the down payment is less than 20%. FHA loans also require insurance, which is called the mortgage insurance premium .
However, unlike PMI, you cant as easily get rid of MIP when you reach 20% equity as you can with a conventional loan. In most cases, you have to refinance your FHA loan to a different type of mortgage to remove MIP.
Here are some of the key differences between FHA and conventional loans.
If you dont want to pay the closing costs associated with a refinance or lack the documentation to apply for a new loan, an FHA Streamline Refinance may be a good option as a credit and income check isnt required. To qualify for an FHA Streamline Refinance loan, you must have three months of on-time payments and have had your current loan for at least 210 days. Bear in mind that you still have to pay MIP and a new upfront mortgage insurance fee with an FHA Streamline Refinance.
What is the difference between PMI and MIP?
While theyre similar acronyms, PMI and MIP are different types of mortgage insurance, and which one you pay depends on the type of loan you have.
Here are the key differences.
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Other Good Reasons To Refinance
Another reason to refinance is that you can lower your monthly payment.
In the previous example, that owner could save nearly $100 a month by refinancing. That kind of green adds up fast. And it can make a big difference as your financial situation changes.
Maybe a baby is on the way. Perhaps you want to buy a new car. Or youre seeking to put away more money toward a college fund. These are all important motives to reduce your mortgage payments with a lower interest rate.
Refinancing sooner versus later can also be a good strategy if you:
- Want to take extra cash out to pay for something big like home improvements
- Want to use equity for debt consolidation, paying off high-interest credit cards or personal loans
- Want to switch from an adjustable-rate mortgage to a safer fixed-rate mortgage
- Need to take a partner off your loan due to a recent separation
- Have an FHA loan, which requires mortgage insurance premiums, and you want to eliminate those extra payments. A conventional wont require private mortgage insurance if you have at least 20 percent equity in your home
- Have seen a boost in your credit score recently you may qualify for an even lower refinance rate with a higher credit score
Yes, you could save money by getting lower monthly payments. But a mortgage refinance loan can also help you with bigger-picture financial goals.
You Might Be Able To Refinance Right After Closing
With mortgage rates at historic lows, you might be tempted to refinance even if you just bought your home or refinanced recently.
The good news is that many loan types have no waiting period to refinance.
If you want a cash-out refinance or Streamline refinance, you might have to wait six months since your last closing. Otherwise, you can likely refinance as soon as you want.
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What Are The Drawbacks Of A Conventional Loan Refinance
On the other hand, there are some costly disadvantages associated with refinancing an FHA loan to a traditional mortgage. The biggest upfront expense comes in the form of closing costs, which can be anywhere from 2% to 5% of the loans value. If youre refinancing a $200,000 loan with closing costs of 3%, youd have to bring $6,000 in cold hard cash to the closing table.
If you havent built up enough equity in the home, youll probably get stuck paying for private mortgage insurance when you refinance. The combined costs of closing and PMI can zero out any savings in interest if youre not getting a huge discount on the rate.
Your Circumstances Have Changed
Perhaps youd been through a financially difficult period when you got your current mortgage. Maybe your credit score was only fair and you had high borrowings and small savings. You could only get approved for a less desirable type of mortgage with a higher interest rate.
But now your credit score is looking much better, youve paid down some debt and your savings are worthwhile. So if your existing mortgage is penalizing you for who you were, rather than rewarding you for who you are now, it might be time to refinance. A lender will review your circumstances with fresh eyes and potentially offer you a lower interest rate that can help you save money.
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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 everyone’s responsibility and that all content deserves integrity.
No Need To Worry About Refinancing Too Soon
Refinancing is worth it if you discover that you can save monthly or over the life of the loan.
Most mortgage shoppers arent at risk of refinancing too soon and can apply even shortly after their previous loan closes.
Check your refinance savings and dont miss out on lower housing costs.
Step by Step Guide
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How Soon Can I Refinance An Fha Loan
Certain loans have waiting periods before you can refinance. For example, if youre looking to do an FHA Streamline, 6 months must have passed since the due date of the first payment in order to close on the mortgage. You also have to have made six payments on the existing loan.
To refinance into a VA loan, 6 months have to pass before you can apply for a new loan and 212 days have to pass before closing.
With refinancing into a conventional loan, for a rate-term refinance, you just have to be on the title when you apply. For a cash-out refinance, you have to be on the title for 6 months for a conventional or VA loan and on the title and occupying the property for a year on an FHA loan.
How Much Will It Cost To Complete The Refinancing
Depending on your lender and your loan terms, you may pay as little as a few hundred dollars or as much as 2% to 3% of the new loan value to complete a refinancing. If its going to cost you $3,000 to complete the refinance and it will take four years to recoup that money, it may not make sense for you.
Alternatively, if you can refinance and pay only $1,000, and have no plans to sell anytime soon, its very likely worth paying that $1,000 to save over time. In addition, some lenders allow you to roll your closing costs into the amount of the loan, so you dont have to come up with money out of pocket for closing costs.
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Its Better To Refinance Sooner Rather Than Later
Its never too early to think about refinancing your home loan.
There is no minimum time wait. A mortgage is a contract. As soon as you can get a better deal, you should terminate the contract and take that better deal, says Realtor and real estate attorney Bruce Ailion.
Closing attorney Chuck Biskobing says there are no major risks to refinancing within a year or so of purchasing.
Ive seen people refinance three times in a year to follow falling interest rates, says Biskobing.
Say you want to apply the money saved each month back to the loan in the form of accelerated payments toward the principal, he says. If so, you will almost certainly pay off the new loan faster than the old loan. And youre not adding enough time on the loan to really matter.
In other words, youre not resetting your loan term by much if youre just six or eight months into the mortgage.
But if youre much further into your loan say five to 10 years resetting to a new 30-year mortgage may not pay off.
To find out if a refi is worth it based on your remaining term, try this refinance calculator.
Understanding The Net Tangible Benefit
FHA Streamline Refinancing applicants must demonstrate a valid reason for refinancing, which is determined by something called the Net Tangible Benefit. According to the FHA, this can be either:
- A 0.5% reduction of the principal and interest of the mortgage payment, plus the annual mortgage insurance premium , or
- A refinancing from an adjustable-rate mortgage to a fixed-rate mortgage
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Learn If Refinancing Your Fha Loan Is Right For You
Many people can benefit from refinancing their FHA loans. In the long run, you can usually save money. If you are looking to remodel your home to increase its value, or you want to pay off high-interest debt, refinancing can get you that extra cash you need. With the many options, it is wise to speak with a loan officer.Reach out to us, and we will help you decide if refinancing your FHA loan is right for you.
Refinancing From An Fha Loan To A Conventional Loan: What To Know
As home values continue to rise, many borrowers find that they have more equity in their home. This increased equity is largely what makes it possible to refinance from an FHA loan to a conventional loan. Conventional loans may have stricter credit requirements or require borrowers to provide more financial documents and disclosures to lenders, but switching from an FHA loan to a conventional loan can result in significant savings. As previously detailed, many borrowers with FHA loans struggle under the weight of the added monthly mortgage insurance costs, but with a conventional loan, all mortgage insurance requirements are canceled, so long as the homeowner has a 78% loan-to-value ratio on their home. Although conventional loans typically have higher interest rates, borrowers are also able to take out larger loans through refinancing to a conventional mortgage. While there may also be high closing costs associated with a refinance, these are often worth it, given the benefits of switching from an FHA loan to conventional loan.
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The Conventional Loan Refinance
Many borrowers like to get an FHA loan for their purchase loan because of its flexible guidelines and low down payment requirements and then refinance into a conventional loan down the road. This gives borrowers the chance to purchase a home sooner while still having the option to refinance into a conventional loan in the future.
Conventional lenders typically like you to have at least six payments made on your mortgage before you can apply for a conventional loan refinance. In order to qualify for a conventional loan, you need:
- 680 credit score
- Max 95% LTV for a rate/term refinance
- Max 80% LTV for a cash-out refinance
- On time mortgage payments
The main benefit of refinancing into a conventional loan is the lack of mortgage insurance. If you have at least 20% equity in the home, you wont have to pay any mortgage insurance. If you have an LTV higher than 80%, you will pay PMI, but you can request cancellation once you owe less than 80% of the homes value. This can happen according to the amortization schedule if you make your payments on time. It can also happen faster if you make extra payments towards your principal and/or the home appreciates.
FHA loans dont allow cancellation of mortgage insurance. You pay it for the life of the loan, so its something to consider when you look at your options for refinancing your FHA loan into either another FHA loan or a conventional loan.
Refinancing A Conventional Loan Into An Fha Loan
Refinancing into an FHA loan from a conventional one is a great option for those homeowners who would like to refi, but dont have a stellar credit score to qualify for a conventional refinance. Your rate could be lower with an FHA loan, but you will have to pay mortgage insurance, potentially for the life of the loan.
Now that youre familiar with some of the basic guidelines of an FHA refinance and what it can offer you, find the refinance option thats right for you. Get in touch with Newrezs team of mortgage experts to learn more.
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So How Can You Refinance From An Fha Loan To A Conventional Loan
Before you consider refinancing, you should find out how much equity you have on your home to verify that you meet the 78% loan-to-valuerequirement. Additionally, you should conduct what is known as a break-even analysis. Although refinancing from an FHA loan to a conventional loan offers great potential for savings, that might not always be the case. By conducting a break-even analysis, you can chart how much money you stand to save over time by moving ahead and refinancing. You should also seek the approval of the FHA, even if youre not switching to a different lender. Overall, refinancing from an FHA loan to a conventional loan is the same as a normal refinance.