Are you a homeowner with a current Federal Housing Administration (FHA) loan? If so, there are options in today’s mortgage lending market that could help save you money. Options include refinancing to a Conventional home loan with a low rate, eliminating FHA mortgage insurance (MIP), or using the FHA streamline refinance program.
Of course, like any home loan you would need to meet the qualifying lending criteria. We will cover these options in this article and more.
- Here is our Mortgage Refinance Loan Calculator for assistance
Get rid of mortgage insurance (MIP)
Home values have increased and it may be the right time to refinance your FHA home loan and eliminate the mortgage insurance (MIP) off your monthly mortgage payment. Most homebuyers of FHA mortgages put the minimum down payment of 3.5%. So with that said, you most likely have an annual MIP premium of 0.85%. On a $150,000 loan balance that adds up to $1,275 per year you are paying. If you can obtain even a similar mortgage rate without having the added MIP insurance, it could make sense to refinance and eliminate this expense.
Besides potentially eliminating the MIP costs by doing a new conventional refinance, I asked Chris Hatton, a 20 yr. Mortgage Loan Officer with PNC Bank this question:
- Does anything stand out on what people are doing with a refinance these days and how the process is different?
- He said “clients love the idea of having a rate below 3.0% and that’s available now for both 15 and 30 years terms. Many transactions these days don’t require an appraisal so that’s another incentive to consider doing a refinance with less cost and hassle than before”.
A good 1st step is to examine your current FHA mortgage to see how much you are being charged for mortgage insurance. Whether it is a monthly or annual charge and what are the percentage points being used to calculate this cost? It can be confusing but a new lender can assist you with learning this information. Or your current loan servicer can help.
Reduce term to 20 or 15 yr.
If you will lower the mortgage interest rate, it is possible the monthly mortgage payment will be similar while chopping off years of the current mortgage.
- A shorter term mortgage saves you thousands in interest. And builds home equity much faster.
A $150,000 mortgage at 4% for principal and interest (PI) on a 30 yr. term equals $716.12 per month. On a new 20 yr. mortgage borrowing the same $150,000 with a 3% rate equals $831.90. As you can see that is not a huge difference in monthly payment and the interest savings would be significant.
- When Should You Convert a 30-Year Mortgage to 15 Years?
It’s all in the numbers. A good honest and experienced mortgage loan officer can provide options suited to your needs and financial profile. There are many factors that need to be evaluated to help you make the best informed decision.
FHA streamline refinance could be best
This program has many benefits but is not for every FHA borrower. The main objective with a FHA streamline is to lower the rate, shorten the term and achieve a smaller monthly payment. There has to be a clear net tangible benefit or you will not get approved.
- Benefits include no home appraisal, lower documentation, less closing costs and a faster closing.
You will still have mortgage insurance (MIP). So use a conventional refinance if you want to avoid this and if you have enough home equity as discussed earlier. But you may achieve lower MIP costs then you have now depending how long ago you obtained your FHA mortgage.
The FHA charges two kinds of mortgage insurance that apply to FHA Streamline Refinance loans.
- The upfront mortgage insurance premium (upfront MIP) is equal to 1.75% of the loan amount.
- The annual mortgage insurance premium (annual MIP) is equal to 0.85% of the loan amount, which you pay in monthly installments.
- For more information click on FHA mortgage insurance (MIP)
Homeowners who originated an FHA loan between 2010 and 2015 may still be paying an annual MIP rate of 1.35%. In these cases, refinancing to a lower interest rate and lower MIP rate of 0.85% could produce significant monthly savings.
- Why does the FHA offer Streamline refinancing?
It’s in the Federal Housing Administration’s best interest to offer Streamline refinancing. FHA favors lower rates because it’s an insurance plan and not a mortgage lender. They have no incentive to keep borrowers in higher rate loans because it doesn’t profit from the interest paid on FHA loans. Lower rates mean smaller monthly mortgage payments. Smaller payments are easier for borrowers to afford. And that means fewer default claims against them.
- Helping homeowners refinance into more affordable home loans protects them from having to pay private lenders for loans that borrowers stop paying on.
You still have to qualify for the program. Here are the requirements:
- Be current on the existing loan with all mortgage payments made on time for the last year.
- You must own the original property for at least 210 days before you can qualify.
- Whichever bank or mortgage broker you choose must be FHA approved.
- FHA Streamline loans do not require an appraisal, but a no-appraisal loan cannot exceed your current loan.
- Closing costs must be paid up front or arranged for through a "no-cost" FHA Streamline loan. No-cost loans usually have slightly higher interest rates.
- You may also choose to include the closing costs into your loan. In these cases you must have enough equity in the home to cover the extra amount.
Find the best lender
It is very important to find the right FHA lender and loan officer. FHA programs require more understanding. Lenders that specialize in these have the experience and can make the process more efficient and help get you to the closing table faster.
It’s important to disclose all of your personal financial information so you can get the most accurate quote before you make a final decision.
More than just selecting the right FHA lender, be sure you are working with a seasoned FHA mortgage loan officer that knows what they are doing. Like any profession, the better quality professional you deal with the smoother the process you will experience. And yes, savings can depend on how competent your loan officer is.
Check rates from home loan lenders: Home loan lender rates
Refinancing an FHA Mortgage FAQ
If you obtained your FHA mortgage after 2013 you will not be able to cancel mortgage insurance (MIP) no matter how much equity you have now.
You will need at least 20% home equity to avoid mortgage insurance on a new home loan refinance. Ask your realtor to assist with current home values or use online tools to get an idea.
Plus cash out refinance is possible if you have built up enough home equity.
Closing costs on a new refinance can vary widely from lender to lender. And program to program. So shop around and find an honest loan officer. Ask for referrals from friends and recommendations on your social media accounts.