FHA loans are one of the best options for individuals and families purchasing a first home. The Federal Housing Administration backs these mortgages, and they are a great option since they require less down payment and have less stringent requirements for borrowers than private mortgage lenders.
With the current massive fluctuations in interest rates, many borrowers, including those with FHA loans, are left wondering if it’s a good time to refinance their mortgage. Refinancing may be a great option, depending on your circumstances. For some borrowers, a refinance could lower the monthly payment, remove the mortgage insurance requirement (assuming you have at least 20% equity in the home), or allow you to cash out equity for other expenses.
But refinancing comes with risks, and it’s not always the best option for every borrower. If you aren’t saving enough on your mortgage payment, you could lose money due to closing costs or be required to meet higher standards than the original ones required to secure the FHA loan. To determine whether refinancing is the best option for you, it’s worth spending some time carefully considering all your options, which may ensure you select the best path forward.
If you do decide to move forward with refinancing an FHA loan, you have several options available, including:
- FHA Simple Refinancing: An FHA Simple Refinance is the easiest of all options. It is a straightforward method that allows homeowners to lower their interest rates by switching to an adjustable-rate mortgage or a fixed-rate loan. The benefits of a simple refinance are that you can lower the interest rate and remove co-borrowers from the FHA loan (sometimes, co-borrowers are required to secure the FHA loan initially). Additionally, you can finance the closing costs, which reduces your need for up-front capital. Unfortunately, this option will not help individuals looking to tap into their home equity as there is no cash-out feature, and borrowers must pay for a current home appraisal. Additionally, the credit requirements to secure this refinance are more stringent than FHA loans, so borrowers must have a credit score of at least 580 to get this loan.
- FHA Streamline Refinance: An FHA Streamline refinance is similar to a simple refinance but doesn’t require an appraisal or in-depth credit report, which means it can be approved much faster than a simple refinance. A streamlined refinance is only an option for borrowers who have not been more than thirty days late in the last six months or had more than one payment more than thirty days late in the last twelve months. Additionally, the borrower must have made at least six payments within at least 210 days since the original loan was secured. For those that quality, this option allows the borrower to refinance for more than the home is worth, but the closing costs must be paid upfront, cash-out options are limited to $500 from the home equity, and borrowers must pay mortgage insurance premiums.
- FHA Cash-Out Refinance: This option allows you to convert your home equity to cash by letting the homeowner refinance the existing loan into a new mortgage for a greater sum. Then, they receive the difference as one lump sum payment. Qualifying for this type of refinance requires a credit score of at least 580 and a debt-to-income ratio of 43% or less. The loan-to-value ratio cannot exceed 80% of the home’s value, meaning borrowers must keep at least 20% equity. This option is ideal for borrowers who want to use the value of their equity. However, it may increase the loan amount and/or monthly payments. It also requires mortgage insurance and a home appraisal.
- FHA 203(k) Refinance: The last type of refinance option, an FHA 203(k) loan, is ideal for owners wanting to add home improvement or renovation costs to their mortgage loan. Within this category, there are two options – a limited 203(k), which allows borrowers to take out up to $35,000 for home improvements, or a standard 203(k), which has no cap but requires that the homeowner spend at least $5,000 out of pocket on home repairs. The benefit of this option is that it can often be secured with a lower interest rate than other types of home improvement loans, and it has less strict credit score requirements. However, the approval process can take longer and is limited to primary home use.
Refinancing an FHA mortgage can be a great financial move under certain circumstances. To learn more about refinancing FHA loans, contact 7th Level Mortgage today!
7th Level Mortgage is a leading one-stop mortgage company providing deeply informed, custom-tailored assistance with each mortgage transaction phase. If you are searching for a home loan in New Jersey, Pennsylvania, Delaware, Maryland, New York, or Florida, please contact us today so that we can determine the best Mortgage Lender to place your loan with and get you the best possible rate and program.