Can I Refinance an FHA Loan?
The short answer: Yes! So, let’s dig into how to refinance your FHA loan, and answer some common questions about the process.
You’ve probably heard that people are interested in taking advantage of a refinance when interest rates are low. Lower interest rates means lower interest payments, which is a win for your wallet!
If rates have dropped since you closed on your government-backed FHA loan, you’re likely asking yourself: “Is a refi right for me?”
The answer could be “Yes!” Let’s delve into whether refinancing your FHA loan is the smart choice for your situation, and what you need to make it happen.
What can I do to refinance my FHA Loan?
For long-time readers, you may remember that refinancing is just paying off one loan by getting another loan. The rule of thumb is that if you can benefit from a refinance, either by getting better loan terms or a lower interest rate, you should consider doing it.
There are plenty of great reasons homeowners refinance their mortgage, like:
- Lowering their monthly payment
- Paying off their loan sooner
- Switching from an adjustable-rate loan to a fixed-rate loan
- Tapping into home equity to take cash out
If you’re looking to take advantage of a lower interest rate, better loan terms, or get cash out, you should consider a refinance.
If you want to refinance your FHA loan, there are two basic options:
1. Refinance to a different loan
You can replace your FHA loan with another one, such as a Conventional loan, which isn’t backed by the government. While it may be harder to qualify for, there are plenty of benefits that come with a Conventional mortgage.
For starters, you could avoid mortgage insurance entirely by replacing your FHA loan. As long as you’ve reached 20% equity in your home, you won’t have to pay any mortgage insurance on a Conventional loan.
You can also tap into your equity to get cash out with a Conventional refinance, which would help if you need to make home improvements or pay for other big expenses.
Something to keep in mind: You’ll need to pay for a new home appraisal, as well as closing costs (which typically run anywhere from two to five percent of the loan amount).
2. Refinance to another FHA loan
If you don’t qualify for a Conventional loan, you’ve still got options! You can refinance your current FHA loan to another one, including:
- FHA Simple Refinance or ‘Rate & Term’ refinance
“Simple” is in the name, so it must be pretty easy, right? Most homeowners use the “simple” or “rate & term” refinance to either take advantage of a better rate or switch from an adjustable-rate mortgage to a more set, fixed-rate mortgage.
Lenders will require you to go through a credit qualification process and a new appraisal when you apply for the loan. However, it’s possible you could get a better interest rate if you’ve built up equity in your home.
- FHA Streamline Refinance
Like the name suggests, this loan is more streamlined than the “simple” refi because it allows you to refinance with less paperwork and fewer steps.
Not only can you lower your interest rate, reduce your monthly payment, or shorten your loan term, you can get it done without having to go through a home appraisal, provide bank statements and your credit report, or verify your income. The lender will just use the information gathered from your initial FHA loan.
The Streamline is a better option when your home hasn’t risen much in value, or you’re planning to sell your home soon, because it helps you avoid adding closing costs to your principal balance.
- FHA cash-out refinance
If you need cash to make home improvements, consolidate debt, or anything else, the FHA cash-out refinance is for you.
A cash-out refi allows you to take out a loan that’s bigger than your current mortgage, pay off the original loan, and pocket the difference. You can use the cash for whatever you need! You must have at least 20% equity in your home to qualify.
How soon can I refinance my FHA loan?
If you already have an FHA home loan, and you’ve made at least six months of on-time payments, you should be good to go refi! For FHA cash-out refis, you should provide 12 full months of on-time payments.
Are there closing costs?
Like any loan, there are closing costs, but with a Streamline refi, you won’t have to pay for a credit report or appraisal like you might with other loans.
Will I still need to pay mortgage insurance?
If you refinance your FHA loan to another FHA product, you’ll still need to pay mortgage insurance premiums (both upfront at closing and in monthly payments) on your new refi.
What do I need?
Like we mentioned before, make sure you’re keeping up-to-date with your mortgage payments for several months.
For the simple (‘rate and term’) refinance, or the cash-out refinance, you’ll need to provide your credit report, full income and employment verification, and undergo a home appraisal.
You can check with your lender to find out any specific documentation you may need to provide for a Streamline refinance.
Ready to refi? Your first step should be to find out just how much you could save on your monthly bill! Use our calculator to learn how a refi can free up your budget.