Refinancing an FHA loan to a traditional mortgage, or lower rate FHA loan can save homeowners thousands of dollars over the life of their mortgage.
Let's take a look at the options.
When should I refinance my FHA loan?
There is never a universal answer to when you should refinance any mortgage loan. Having said that, rates are low, values are up, and lenders want your business. Now is as good of a time as any to give it a look.
Refinance an FHA Loan to a Conventional Loan
If you purchased your home with an FHA loan, you likely did so because one or more of the requirements of a traditional conventional mortgage was unattainable when you bought your house. Whether it was less than ideal credit, not enough saved for the larger down payment, or some other conventional loan guideline, this is perfectly normal and precisely why FHA loans exist. FHA loans make homeownership possible for millions of Americans who otherwise may never be able to make a home purchase.
Now that you’ve taken the leap into homeownership with the help of an FHA loan, are you able to capitalize on the low interest rates and rising property values of the past few years to lower your monthly payment and overall cost of your mortgage? As it is with every hypothetical question posed under the topic of mortgages, it depends.
When considering refinancing your FHA loan, it’s important to discuss with your loan officer the possibility of now qualifying for a conventional mortgage. While FHA offers a streamline refinance, and we’ll get to that, refinancing to a conventional loan from your FHA loan will most likely yield the greatest savings.
As those with FHA loans already know, FHA loans carry an annual mortgage insurance premium that is paid monthly as part of your house payment. This is a significant cost that shows up every month on your mortgage statement that will never go away as long as your loan is in repayment. If you can get out of this by refinancing into a conventional loan, it’s worth considering. Of course, it’s important to weigh the costs of refinancing, your new interest rate versus your current interest rate, and how much time remains on your existing loan before you pull the trigger on any refinance.
Our refinance calculator was designed to demonstrate how much refinancing will save or cost you over time.
FHA Streamline Refinance
Once you have an FHA loan, the lender holding your FHA loan is insured from loss if you fail to make the payments and default on the loan. That’s what those FHA mortgage insurance premiums paid upfront and monthly are for. FHA absorbs the risk so mortgage lenders don’t have to. It’s a great system that works well for all parties. FHA streamline refinance loans expand on this premise.
If you’ve been making your FHA payments on time, it stands to reason you would be more likely to continue making those payments on time if your payment was lower, right?
An FHA streamline refinance lowers the interest rate and monthly payment without going through the full process of refinancing. By doing this, the risk of default is lowered because your monthly payment is now easier to make. Therefore, FHA streamlines typically do not require an appraisal, income verification, or a full credit report.
If you’re thinking a streamlined FHA refinance is the way to go, it’s important to discuss with your loan officer any lender requirements above and beyond what FHA permits. For example, some may require a minimum credit score otherwise deemed acceptable by FHA.
You’ll also want to explore the option of qualifying for a conventional loan as discussed above. While FHA streamlines are great, the still carry mortgage insurance for the life of the FHA loan. Removing that MIP payment can end up saving more monthly than a lower interest rate.
How do I refinance my FHA loan?
Connect with a lender or contact the lender listed on your mortgage statement to begin the refinance process. FHA does not originate loans, so obtaining an FHA streamline through FHA directly will not work. You’ll need to work with a mortgage lender regardless of which refinance option you seek.