If you keep up on housing market news, or even if you don’t, you may have heard about the great rates available right now.
It might be time to take advantage and refinance your loan for a better rate.
Refinancing is a good idea even if rates aren’t low because you shouldn’t be paying more than you have to for your home.
The FHA offers a beneficial refinance program that allows its customers to bypass additional credit and income checks for a refinance.
You could quickly have a lower payment and interest rate. But there are some costs you should consider.
An FHA refinance will come with closing costs and insurance premiums. Is it still worth it?
Let’s break down everything you need to know about FHA refinance, the streamline program, and closing costs.
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What’s the difference between an FHA Refinance and FHA Streamline Refinance?
There are several options for FHA refinance, including:
- Rate and term refinance (for those without an FHA loan)
- Simple refinance (for those with an existing FHA loan)
- Streamline refinance
- Cash-out refinance
- FHA 203(k) refinance
Current FHA borrowers will likely focus on either a simple refinance or a streamline refinance. There are a few differences that set them apart and that you’ll want to pay attention to.
First, a simple FHA refinance allows borrowers to change their loan terms from 30-year to 15-year. In a streamline refinance, loan terms can only change from 15-year to 30-year and not vice versa.
This could be important if you’re hoping to shorten the length of your loan.
A simple FHA refinance also has the caveat that if the borrower’s profit from the refinance exceeds $500, it’s automatically applied to your principal amount.
Another difference is that a simple refinance will require a new appraisal and a new credit check. New appraisals are not required with the FHA streamline refinance, but you do have the option to request a new assessment of your credit and financial status. Doing so may get you an even lower new interest rate.
In either refinancing scenario, you can’t complete a cash-out refinance, meaning that you can get cash back from the difference between your new loan amount and what you still owe on your mortgage. You will need to specifically talk to the lender about an FHA cash-out refinance option.
What are typical FHA refinance closing costs?
Whether you choose a simple or streamline refinance, there will be out-of-pocket closing costs. They can’t be rolled into the loan such as with conventional loans.
Closing costs will vary by lender and other details of your loan. They include fees for things like loan origination, underwriting, processing, and title insurance.
The estimated closing costs for an FHA streamline refinance vary from 2-5% of the loan amount. If your loan amount is $150,000, your closing costs could be between $3,000 and $7,500.
Since an FHA refinance does not require a new appraisal, you save about $500-$1,000 without that added cost.
It’s best to shop for lenders for your refinance as well. One lender may estimate lower closing costs than another.
No matter how you do it, closing costs are unavoidable.
How to lower your FHA refinance closing costs
Because FHA streamline refinance loans are easy for lenders to work with, they’re more than happy to compete for your business.
It’s worth it for the borrower to get quotes from multiple lenders and then use them to negotiate to get the lowest possible costs.
Lenders also get a service release premium for each loan that they close. Basically, this is an amount of money that the lender collects from a loan aggregator once the loan is closed.
That premium allows them to potentially waive thousands of dollars to get your business. So you could potentially have your closing costs paid completely by the lender.
Closing costs are unavoidable but the borrower doesn’t necessarily have to be the one who pays them.
Can I refinance an FHA loan into a conventional loan? Should I?
Borrowers may refinance their FHA loan into a conventional one if they have 5% equity in their home.
This is something to consider to get rid of the Mortgage Insurance Premium (MIP) that is required on all FHA loans.
MIP is the FHA version of Private Mortgage Insurance (PMI) that is often required on conventional loans.
These insurance payments protect the lender if the borrower defaults on their loan.
The MIP is always required through the life of the loan, and the only way to get rid of it is to refinance into a conventional loan.
Whether you switch from an FHA to conventional depends on your own situation.
You could get a lower rate with a conventional loan, but you’ll likely need more paperwork than what is required of a streamline refinance, such as income and asset verification. You also may need to get a new appraisal.
The purpose of the FHA streamline refinance is to lower your monthly payment and rate without all that hassle.
It is a personal decision whether you decide to refinance into a conventional loan or not.
Find your perfect refinance option
Refinancing comes with many benefits to the borrower. It will depend on your specific situation though, which program is right for you.
Perhaps you’re in a better financial situation now than you were when you got your original loan, so completing another credit check could get you an even better interest rate. That’s up to you to decide, and discussing it with a lender can help.
My Perfect Mortgage partners with trusted lenders who could be perfect for your situation.
Just tell us a little bit about your refinance scenario and we’ll match you with the right lender.
Take advantage of our tools and experience, and let us take some of the decision-making off of your hands. Get started with My Perfect Mortgage today!