Refinancing Your FHA Loan the Smart Way
The attraction of a first-time home loan through the Federal Housing Administration (FHA) can be strong when prospective buyers have found the perfect house. With less stringent credit expectations and lower down payment requirements – just 3.5% – it’s not surprising that almost 1 in 5 buyers take the FHA route.
Many of those savvy homeowners are now looking at the current low interest rates and the growing home equity in a still-strong housing market and thinking about refinancing their original mortgage. If you’re one of them, you may be wondering whether to stick with the government-backed program that helped you get into your home, or to investigate conventional options. It all depends…
The FHA certainly provides choices if you decide to capitalize on the healthy equity in your home. Indeed, if your current mortgage rate is higher than 3.75% or if you have an adjustable rate loan, then it might be time to consider refinancing.
As with conventional means, FHA borrowers are able to take cash out of their equity by refinancing. And unlike an FHA Rehab loan which earmarks the proceeds for home improvement, homeowners are free to use that money however they’d like – debt consolidation, education, or just a rainy day. Some of the government’s restrictions include primary residency and a maximum of 80% loan-to-value, but many lenders are still able to accommodate those with low credit scores through FHA refinancing.
While making it much easier for first-time buyers to own a home, the FHA offsets the risks by requiring two types of mortgage insurance. One is an upfront cost and the other, a monthly payment, or MIP, is generally for the life of the loan. The rate varies and may have added upwards of a few hundred dollars to your monthly payment.
Many homeowners choose to refinance conventionally in order to eliminate this expense, although FHA monthly insurance premiums have dropped lower than they have been in years. In addition to the visible monthly savings, you can calculate the MIP over the life of your loan to see the impact of eliminating it, balanced with other costs and fees. Conventional refi options have the same requirements as an FHA Cash-Out – home appraisal, credit report, 20% equity.
Is refinancing the right choice for you, and if so, which direction makes more sense? If the current interest rates are lower than when you purchased, and you know your home value has increased, it makes a lot of sense to reap the financial benefits. Whether you want to refinance for cash-out, term reduction or switching from adjustable to a fixed rate, will all determine if FHA or conventional is the more pragmatic course to take.
Our team at EnTrust Funding (ETF) can take the guess work out of the decision by discussing your personal credit situation, the current rates and MIPs, your home value, and more. Give us a call today to schedule the best time for you.