Many homeowners choose a loan with the Federal Housing Administration (FHA) for their first mortgage. FHA loans are attractive to first-time homebuyers because they’re easy to obtain financing through with minimal down payments and fair credit scores. However, FHA loans come with some heavy burdens in the form of premiums paid for mortgage insurance. If you have an FHA loan, you may want to consider refinancing.
What is an FHA Loan?
An FHA loan is a good option if you’re looking for a loan with a lower down payment. The Federal Housing Administration backs the loan, allowing an acceptable down payment of as little as 3.5% of the purchase price compared to some other mortgages.
If you have an average credit score or are still in the process of developing your credit, an FHA loan is a great option as they’re not as strict when it comes to credit score requirements.
While these qualities make for an attractive loan, borrowers still need to pay insurance to make up for the generous credit requirements and lower closing costs. FHA loans charge a 1.75% Up Front Mortgage Insurance Premium (MIP) usually added to the loan amount. On top of this, an FHA borrower pays the MIP monthly as well.
So, while it may seem like you’re saving money at first, with the extra insurance added in, you might want to consider refinancing your FHA loan to a conventional loan when the time is right.
Pros and Cons of FHA Loan Refinancing
Although FHA loans are sometimes easier to qualify for compared to other mortgage options, conventional loans have lower insurance and allow you to drop their private mortgage insurance (PMI) payment once the loan to value ratio reaches at least 78%. FHA loans can also require MIP if you put down less than a 10% down payment for the life of the loan or 13 years for a 10% or more payment.
Compared to an FHA loan, a conventional loan has its benefits as well. Pros for a conventional loan can include:
- Lower PMI payments
- Removal of mortgage insurance
- Option for cashback using your home’s equity
- Lower interest rate
- Decreased monthly mortgage payment
- Option to refinance to an adjustable or fixed rate
- Shorter loan term
While an FHA loan is easy to qualify for and can have great benefits, as time goes on, you may find yourself leaning toward the advantages more conventional loans offer. This is why it’s important to go over the pros and cons when determining whether to refinance an FHA loan.
There are a couple of disadvantages when it comes to refinancing out of an FHA loan. One important disadvantage is the closing costs. A closing cost is a fee charged by a lender for originating the loan. Closing costs can range from 1%-5% of the loan amount. You can also find yourself running into more stringent income and credit qualifications.
FHA Streamline Refinancing
One option when refinancing an FHA loan is to see if you qualify for an FHA streamline refinance.
An FHA streamline refinance requires less paperwork and goes through without a credit or income check if you’ve kept up with your payments for the last 6 months. You must also produce a net tangible benefit when you refinance. This depends on the type of loan and interest rates. Basically, the refinance needs to lower your interest rate or payment to be of any use.
There will still be annual MIP payments with an FHA streamline refinance, but it’s a good option to consider to take advantage of any current low-interest rates.
At BrightPath, we offer a variety of mortgage loan options, including conventional loans, with a down payment as low as 3%. Whether you’re deciding between an FHA loan or a conventional loan, or whether or not to refinance, we’re here to help you make the right decision.
Call us today at 888-222-6003 or visit our website to learn more the best mortgage loan