Refinancing an FHA loan? Here's everything you need to know

When buying a home, many buyers end up choosing an FHA loan. An FHA loan is a mortgage insured by the Federal Housing Administration. That government backing allows these loans to have a more flexible down payment and credit requirements than conventional loans, which makes them a good fit for those who have lower credit scores or less money in the bank.

However, FHA loans aren't just for first-time homebuyers -- it's also possible to refinance into an FHA home loan. If you think that an FHA refinance loan might be the right fit for you, read on below. We've laid out the information that you need to know before getting started.

What are the different types of FHA refinance loans?

There are a few different types of mortgages from FHA that can be used in a refinance transaction. They are as follows:

1. FHA streamline
2. FHA simple
3. FHA cash-out

1. FHA streamline

An FHA streamline refinance is a simplified version of the refinance process meant for existing FHA borrowers. Generally, an appraisal is not required and neither is a credit check, which makes it a good option for those with a tenuous credit history.

2. FHA simple

If you don’t qualify for an FHA streamline refinance, you can consider an FHA simple refinance. This type of mortgage is generally used to lower your interest rate or change from an adjustable-rate mortgage to a fixed-rate loan. Unlike the streamline option, it does require all the usually refinance documentation.

3. FHA cash-out

With a cash-out refinance, you can borrow more money than you owe on the home and the difference between what you owe and what you borrowed is given to you in cash. Typically, people use this type of loan to cover big expenses like renovations or medical debt.

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Pros and cons of refinancing an FHA loan

It comes as no surprise there are both advantages and disadvantages to refinancing an FHA loan.

Pros

• Lower your monthly payment: The biggest benefit of refinancing your mortgage is the ability to lower your monthly payment, usually through lowering your interest rate.
• Change your loan type: However, you can also change the type of loan that you have by refinancing. For example, if you have an adjustable-rate mortgage right now, you can refinance into a fixed-rate option to add more stability to your payments.
• Pay off your loan sooner: Finally, refinancing your loan can allow you to pay off your loan sooner if you switch from a 30-year loan to a 15-year option.

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Cons

• FHA closing costs: Refinancing a loan with FHA does come with closing costs. Typically, these costs amount to between 2% and 5% of the loan amount. However, notably, in this case, you will have to make your upfront and mortgage protection insurance (MPI) payment all over again.
• Loan limits on a cash-out refinance: The FHA limits how much you can borrow against your home. The maximum loan-to-value ratio that you can have while doing a cash-out refinance is 80%.

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How to qualify for an FHA refinance loan

• FHA streamline: The FHA streamline refinance program is for those who already have an existing FHA mortgage. You must also be current on your mortgage, which means you're up-to-date on all your payments. Finally, there must be a “net tangible benefit” to refinancing, which is another way of saying that there must be a noticeable benefit to refinancing.
• FHA simple: As stated above, an appraisal and the borrower’s credit history are both considered for loan eligibility on an FHA simple refinance.
• FHA cash-out: In order to do a cash-out refinance with FHA, you must keep at least 20% equity in your home.

What are today’s mortgage rates?

It's important to note that interest rates are currently at historic lows. According to Freddie Mac, the average rate on a 30-year fixed-rate loan is currently just 2.79%, Those numbers are slightly up from a rate of 2.71% this time last month, but down from 3.65% at the same time last year.

If you think that refinancing your mortgage can help you save money, use an online refinancing calculator to help get a sense of what your new monthly cost could be. Credible can also help you crunch the numbers.

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The bottom line

If you think that refinancing into a loan that the FHA insures is the right choice for you, your first step should be to talk to a lender. They can look at the specifics of your financial situation and tell you which type of FHA refinance is best for you.

IS IT WORTH IT TO REFINANCE FOR 1 PERCENT?