Should You Refinance Your FHA Loan?

If you already have an FHA home loan (mortgage), you might be wondering whether refinancing home loan is a good choice. Refinancing means replacing your current FHA mortgage with a new one, usually to get a lower interest rate, reduce monthly payments, cash out or change loan terms. For FHA home loan holders, refinancing can offer several benefits, but it’s important to understand when it makes sense to do so.

Why Refinance an FHA Loan?

Homeowners refinance for many reasons. Here are some common reasons why FHA loan holders consider refinancing:

• Lower Interest Rate – If mortgage rates have dropped since you got your FHA loan, refinancing could save you money by lowering your monthly payments.

• Remove FHA Mortgage Insurance – FHA loans require mortgage insurance, which adds to your monthly payment. By refinancing into a conventional loan, you may be able to remove this cost.

• Shorten Loan Term – Switching from a 30-year to a 15-year loan helps you pay off your home faster and saves money on interest over time.

• Switch to an FHA Streamline Refinance – This is a special refinancing option that makes the process faster and easier, with less paperwork and lower costs.

• Cash-Out Refinance – If your home has gained value, refinancing could allow you to take out cash for home improvements, debt consolidation, or other financial needs.

FHA Streamline Refinance: A Simple Option

One of the easiest ways to refinance an FHA loan is through an FHA Streamline Refinance. This option is available only to current FHA loan holders and offers several advantages:

• No home appraisal is required

• Less paperwork and faster processing

• No income verification in many cases

• Lower interest rates may be available

To qualify, you must have made at least six payments on your current FHA home loan, and your refinance must result in a benefit, such as a lower monthly payment or a more stable fixed-rate loan.

Switching to a Conventional Home Loan

Some FHA home borrowers choose to refinance into a conventional home loan, especially if they have built up at least 20% in their home's equity. This can eliminate the need for FHA mortgage insurance, saving homeowners money each month. However, conventional loans often have stricter credit and income requirements compared to FHA loans.

When Refinancing May Not Be the Best Choice

While refinancing can be helpful, there are times when it may not be the best decision. Here are a few things to consider:

• Closing Costs – Refinancing requires paying closing costs, which can range from 2% to 5% of the loan amount. Make sure the savings from refinancing outweigh these costs. Your mortgage broker will tell you upfront the costs you are looking at to acquire your refinaced FHA home loan.

• Loan Reset – If you refinance into a new 30-year loan after paying on your current mortgage for several years, you may extend the time it takes to fully pay off your home.

• Higher Interest Rate – If rates have gone up since you got your FHA loan, refinancing might not save you money. Your mortgage broker will go over your options for your required financial needs.

• Credit Score Requirements – If your credit score has dropped since you first got your FHA loan, qualifying for a better interest rate may be difficult.

How to Decide if Refinancing Your FHA Home Loan is Right for You

To determine if refinancing your current FHA mortgage makes sense, start by calculating your potential savings by using our refinance mortgage calculator. Compare your current mortgage terms with the new loan options available (e.g., FHA refinance, conventional mortgage). Consider the total cost of refinancing and how long you plan to stay in your home. The planned length of time of you staying in your home is fairly important. If the savings are significant and the benefits align with your financial goals, refinancing could be a smart move. Again, your mortgage broker will help you decide if this is a good decision for you at this time.

Speaking with a mortgage broker can also help you explore your options and understand whether refinancing is the right step based on your unique situation. By making an informed decision, you can ensure your home loan continues to work in your best interest.