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Guide to FHA Refinance
Refinancing is a great way to accomplish one of many goals with your existing home loan — you can lower your payments, get a better interest rate or cash out some of your equity. An FHA mortgage refinance offers less stringent eligibility requirements and flexible terms that may be attractive to some homeowners looking to make a change. Depending on your financial situation and your financial goals, an FHA refinance could be the right fit for your needs, but you’ll need to know exactly how these refinances work before taking that leap.
What is an FHA refinance?
Refinancing is the process of taking out a second loan with new terms or a new rate to pay off your existing mortgage loan. Once you do this, you no longer owe any money on your initial loan and only need to make payments on your new refinanced loan. An FHA refinance loan is a form of refinancing where your loan is insured by the Federal Housing Administration.
But that doesn’t mean you work directly with the federal government to refinance your loan. You still get an FHA refinance loan through a private lender, just like you did when you initially took out your loan. The only difference is that the risk to the lender is lower because of the government-backing, which allows lenders to loosen eligibility requirements and offer financing to a wider range of homeowners.
Mortgage loan refinancing rates are quite low right now compared to years past. In response to the economic fallout from COVID-19, the Fed lowered interest rates to try and spark life into the economy. Money is now less expensive to borrow at the highest level, so banks and lenders have passed on some of the savings to customers.
What to expect from FHA refinance rates
Understanding how to approach FHA refinancing rates starts by looking at what your financial goals are. If you’re trying to lower your payments, you may need to extend your repayment terms, along with taking advantage of the lower rates. This will increase your overall cost over the life of the loan, but it will lower your monthly payments.
Still, most people look to refinance to save money overall. While your new interest rate is important, there are other factors to consider, too. If you are refinancing from a conventional loan to an FHA loan, you will be adding mortgage insurance to the bill, in some cases for the life of your loan. This won’t be reflected in your rate, but it will reflect in your monthly payment obligation.
Furthermore, factors such as your credit score, current loan terms, desired new repayment terms, home value, debt to income ratio and loan size play a role in the FHA refinancing rates you’ll be offered.
Who qualifies for FHA loans?
Qualifying for an FHA loan is generally easier than qualifying for a conventional loan or refinance thanks to the government backing the loan. Even with the lowered risk, though, there are still criteria that must be met to qualify for an FHA loan refinance.
First, you need a credit score of at least 580 or above. Second, in most cases, you need a debt-to-income (DTI) ratio of 50% or lower to qualify, though in some cases, lenders are allowed to accept a borrower with up to 55% DTI.
Pros and cons of an FHA refinance
There are a number of pros and cons with an FHA refinance. If you’re in the market to change your current loan terms and take advantage of lower rates, it’s important to understand all aspects of this option before proceeding.
- Relaxed qualifications: Compared to other refinancing loans, the eligibility requirements for an FHA mortgage refinance are much more relaxed. If you have a lower credit score, this could be a major positive.
- Roll in closing costs: Some FHA lenders allow you to roll your new closing costs into the refinanced loan. If you don’t have a lot of extra cash sitting around, this can be helpful to cash in on savings.
- Savings: If you’re able to get a better rate and the conditions are favorable compared to your existing loan, you could stand to save a lot of money with a refinance.
- Mortgage insurance premium: If you currently have a conventional mortgage, your PMI ends when you have 20% equity in your home. If you refinance to an FHA loan, the associated mortgage insurance lasts for a minimum of 11 years and can continue for the entire duration of the loan.
- Many factors to consider: Just because you get a lower interest rate doesn’t automatically mean you are going to save money. When figuring out if an FHA refinance is right for you, there are a lot of different factors you have to calculate before making a final decision. The closing costs alone could make it more expensive to refinance, so don’t just look at the rate or your monthly payment size to determine whether it’s the right move.
How much does an FHA refinance cost?
When you refinance a loan, you are effectively going through the same loan process you went through when you bought your home. Because of this, all of the same costs that were applicable may be applicable again. This includes things like closing costs, appraisal costs, and any other requirements of the lender.
However, there is an option for a streamline FHA loan if you’re refinancing from an FHA loan to another FHA loan, which cuts the costs down significantly and doesn’t require an appraisal or other issues — which also expedites the process.
Ultimately, refinancing may be a fiscally smart move that saves you a lot of money in the long run. The best thing to do is to calculate the total cost of your loan from beginning to end. Compare that cost with the cost of your existing loan. In many situations, the savings could be significant. If you can’t afford the additional closing costs, many lenders will let you roll those into the new loan. You will need to recalculate your total loan costs, though, to make sure you are still saving.
How do I get the best FHA refinance?
Getting the best FHA refinance loan starts and ends with shopping for your different options. While the loans are backed by the government, you still acquire these refinance loans through private lenders. These lenders will each have their rates, requirements, costs and terms. By reaching out to several lenders to get rate quotes, you can ensure you’re getting the best rates and the best terms out there.
You will need to collect some documentation before shopping for rates. Start by collecting your existing loan documents, income statements, documentation on assets and any other documents from the purchase of your home. These documents help lenders give you the most accurate information, and in turn, you’ll get the most accurate rate estimates.
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