Refinancing can be a difficult task for homeowners facing obstacles like sub-par credit, little equity in their homes, or worse yet, homes that are completely underwater. But thanks to the Federal Housing Administration (FHA), refinancing to potentially better FHA mortgage rates has become a reality for many homeowners.
With a refinance, homeowners can restructure their mortgage to take advantage of low FHA mortgage rates, and might also be able to factor in any equity their home has accrued to lower their PMI payments. An FHA refinance can significantly lower monthly mortgage payments, and in many cases could make the difference that allows a homeowner to avoid default or foreclosure.
Because of this, an FHA refinance can be a smart move to save money now and later. Below is a breakdown of the three main types of FHA refinance loans available, qualifications for approval. and the interest rates currently available on FHA refinances.
3 Main Types of FHA Refinance Loans
1. FHA Streamline Refinance
According to the New York Times, an FHA streamline refinance can be a quicker and easier way for current FHA mortgage holders to refinance into today’s FHA mortgage rates. That’s because income, employment, home appraisal and credit score are not re-verified which “streamlines” the process. Instead the refinance application simply reuses your information from your first FHA loan to calculate the terms of the new loan, which will likely have to be with the same bank.
The major requirements for lender approval of an FHA streamline refinance include being current on mortgage payments. The refinance must also lower the monthly mortgage principle and interest payments, according to HUD.gov.
Because the FHA streamline refinance does not require a new home appraisal, it’s a fantastic option if you’re underwater on your current mortgage. As a matter of fact, the FHA encourages homeowners who are underwater to apply. The streamline refinance works like any other home loan and is available as a fixed or adjustable rate mortgage and comes in 15- and 30-year terms. In order to protect approved FHA lenders, homeowners might still be required to pay PMI.
2. Cash-Out FHA Refinance
The beauty of the cash-out FHA refinance is that it grants access to much-needed cash that is tied up in a home, up to 85 percent of the home’s value at purchase or value according to a new appraisal. Cash-out funds are most often used towards home improvements, paying down high-interest debts like credit card balances, or covering education costs. Plus a cash-out refinance often allows a homeowner to lock in lower FHA mortgage rates or change the
length of the term if necessary.
You must have a current FHA loan and enough equity in the home to cover what you “cash-out” in order to qualify. A cash-out FHA refinance also has the following requirements:
- Total monthly housing costs after refinance must stay below 29 percent of gross monthly income.
- You must have owned the home for at least 12 months.
- You must be the primary occupant of the home.
- You must be current on mortgage payments.
The biggest disadvantage is that a cash-out FHA refinance is a riskier product for lenders and thus will require both an upfront mortgage insurance payment as well as a monthly insurance premium, which will be determined by the loan-to-value ratio and the date of your FHA loan origination. If you have significant equity in your home, bypass these insurance premiums altogether by considering a standard, non-FHA cash-out refinance.
3. Rate-and-Term FHA Refinance
Unlike the first two refinance options, a rate-and-term FHA refinance doesn’t require you to have a current FHA home loan to qualify. This refinance option could make a lot of sense if you don’t have enough equity in your home to qualify for a conventional mortgage refinance, your credit is less than perfect, or you have other large debts. For instance, those with credit scores of 500 and over can qualify, and those with debt can have total debts equal to 50 percent of gross monthly income, greater than the 43 percent limit on conventional loans.
In order to qualify you’ll typically need at least two years of steady employment. Similar to the first two FHA options, a rate-and-term refinance will also require upfront and monthly PMI payments in order to protect lenders.
Current FHA Refinance Rates
Most banks and mortgage lenders offer the above and other FHA refinancing options. FHA refinance rates must follow guidelines set by the FHA but are still set by lenders and include a range of lower and higher rates. This means that if you’re planning to refinance it’s worth it to shop around to compare FHA mortgage rates and find the best deal. HUD.gov has a handy search tool to help you find FHA-approved lenders and banks in your area.
Currently, FHA mortgage rates for a 30-year fixed refinance are hovering around 3.75%, reports Mortgage News Daily. Because of the PMI payments required to qualify for an FHA refinance, however, the APR of an FHA refinance could be significantly higher than conventional home mortgages. But if you have little or no equity or damaged credit, an FHA refinance could still be a solid option.