The first step in considering refinancing would be to compare your current mortgage’s existing interest rate with the current market rate. When deciding to refinance or not, it is also important to not only know how much money you will save but how also long it will take to break even on your new FHA loan associated closing costs. FHA refinance programs allows for a higher loan-to-value (LTV) in addition to the relaxed credit underwriting standards.
When should I consider refinancing? How much can I save?
An FHA home loan currently offers 30 year mortgages around 4.5%. If your current interest rate is higher, you may be able to save money by refinancing into an FHA loan or using the Streamline refinance if you currently have an FHA loan. Contact an FHA specialist to see if a refinance is right for you.
Let’s assume you owe $200,000 on your current mortgage with a mortgage payment of $1265 at a 6.5% interest rate. At the end of 30 years you will end up paying approximately $455,000.
If you refinance this loan at a current rate of 4.5%, your payment will now be $1013 per month. At the end of 30 years the total amount paid will be $365,000. You will save over $250 per month and $90,000 in interest making the new mortgage much more affordable. You will have closing costs that can be included in the loan assuming your houses appraises for the amount needed.
When refinancing your home, it is important to calculate the break-even period so you know when the closing costs will be recovered. A lower interest rate will shorten the break even period.
To answer this, you need to know the following:
- Your monthly payment before the refinance;
- Your monthly payment after refinancing;
- The closing costs for your new loan (points and fees).
**The formula is 3 / (1 – 2)**
If your closing costs are $5000 and your payment drops $150 per month, the break even will occur after 34 months (5,000/150).
When you decide to refinance contact an FHA specialist to get the process started.
FHA Home Refinance Options
FHA Loans can be used for a number of situations involving refinancing. For a simple and quick process, consider a streamline or rate-and-term options. For situations where you need to take cash-out, choose the FHA cash-out refinance option.
Already have an FHA Loan?
An FHA Streamline refinance maybe benefit those who currently have an FHA loan. The word “streamline” basically refers to the expedited refinance loan process that requires very limited amount of documentation and qualifying requirements. However, this does not mean that there are no fees or processing fees connected with the loan. The loan fees may also be included in your new loan assuming the new loan amount is not greater than the loan amount of the original loan. In most cases, FHA lenders approve streamline refinance loans without the need for an appraisal or any out of pocket costs to the borrower. A few months of loan payments may also be included in the final loan approval amount. The FHA streamline refinance is for those individuals that wish to either lower their monthly payment or change the term of their existing loan. A borrower cannot take cash out of the mortgage with this loan. Additionally, the borrower must not be delinquent on the mortgage and the current mortgage must already be FHA insured. This loan is also suitable for those borrowers who wish to convert their FHA adjustable rate loan to a fixed rate loan.
FHA Rate and Term Refinance – Lower Monthly Payment
The FHA allows the refinancing of a conventional loan to a FHA loan up to 97.75% of the appraised value. This is known as a rate and term refinance and includes: conventional, VA, sub-prime, private, etc. The rate and term refinance is a great loan for those individuals that have a 1st and 2nd mortgage. The two loans can be consolidated into one loan, assuming the current first mortgage was used in the purchase of the home (it cannot be a revolving line of credit). If the 2nd mortgage is a revolving line of credit, refer to the cash out terms below.
FHA Cash Out Refinance
The FHA offers cash out refinances up to 85% of the appraisal. This loan requires an appraisal and full income documentation. Like the FHA streamline refinance, you may be able to skip two months of mortgage payments out of pocket. The property must be owner-occupied and the borrower must have owned the house for at least 12 months. Once again, the mortgage must not be delinquent. This loan can be used to combine a 1st and 2nd mortgage into one payment.