Complete Guide to Fha Rules In Refinance
President Obama announced this month a new initiative that will reduce mortgage insurance costs for borrowers who refinance their Federal Housing Administration (FHA) loans. The administration estimates that the program could help an additional 2 to 3 million homeowners refinance and lower their mortgage payments.
FHA borrowers get a break
Under the plan, which starts June 11, homeowners who have an FHA-insured mortgage may be eligible for a streamline refinance at a lower insurance premium. The upfront insurance premium, required of all FHA borrowers regardless of the amount of equity in their home or the down payment amount, will be reduced from 1 percent of the loan amount to 0.01 percent.
A recurring annual insurance premium is also required, but refinancing borrowers will have this premium reduced by half from 1.10 percent of the loan amount to 0.55 percent.
If you currently have an FHA mortgage and want to apply for a streamline refinance, you must also meet these requirements to be eligible:
- Loan must have been taken out before June 1, 2009
- You must be current on your mortgage payments
- The refinance must lower your monthly principal and interest payments
You won’t be able to take cash out with a streamline refinance, but, on the other hand, you also don’t have to have an appraisal. The loan amount is based on the amount you borrowed with your previous FHA loan, not the current home value. So even if you owe more on your home than it is worth today, you can still refinance under this program.
Concerns about your credit, income or employment situation shouldn’t affect your eligibility for the program. In the FHA streamline refinance program, your qualifications are based on your mortgage payment history.
Calculating the costs
While the insurance premiums have dropped, you’ll still have to pay closing costs on these refinances. You’ll need to pay these in cash or have your lender wrap the costs into the loan with a slightly higher interest rate. Unlike other mortgage refinance programs, you can’t simply add the closing costs to your loan balance.
On an FHA streamline refinance, your loan amount is based on your current remaining principal balance and the insurance premiums. If you’re unsure about your suitability for the program, you may want to use a mortgage calculator to estimate your potential savings from this type of refinance.
As with any refinance, you should also consider how long you intend to stay in your home and how a mortgage refinance will fit in with your other financial goals. For example, if you’re aiming to reduce your debt, you may want to look into the option of a shorter loan term at a reduced mortgage rate to see if you can afford the mortgage payments and pay off your home faster.
A good lender can help you make these calculations and determine which mortgage refinance option is best for you.
Frequently Asked Questions
Q: Our refinancing options are limited because we do not have much equity in our home, but we are negotiating with our current lender to re-work our loan, which is a relief because we’ve really been struggling to keep up with the payments. We are about seven years into a 30-year mortgage, and the lender has given us a couple of options: either start a new 30-year mortgage at a lower interest rate, or spread the payments out even more with a 40-year repayment period. The problem is, with that second option the interest rate isn’t as low. Which is better?
A: The following are some things you should factor into your decision, though to a large extent, the first item is the most decisive:
- The affordability of your new monthly payment. Since this is your motivation for these negotiations in the first place, it is not worth starting a new 30-year loan if the payments do not fit into your budget. However, between the fact that refinance rates should be significantly lower than mortgage rates were seven years ago, and the benefit of spreading your remaining principal out over another 30 years instead of the 23 years remaining on your mortgage, it seems there is a good chance that refinancing into a 30-year loan could do the trick.
- The opportunity in current mortgage rates. Whatever decision you make, you need to make sure it is one you can live with, because a better opportunity to refinance may never present itself. Current mortgage rates are still among the lowest in history, and even lower than they were a year ago.
- Total interest over the life of your loan. Use a mortgage amortization calculator to compute how much total interest you would pay under the 30-year and 40-year scenarios. Between the longer repayment period and the higher interest rate of the 40-year option, you might be shocked at how much more expensive that solution would be in the long run.
- Your age and future plans. If you view yourself as staying in that house for decades, you might actually want to opt for the shorter loan, so you can foresee a time when the mortgage is paid off. On the other hand, if you plan to move in a few years, you might want to choose the longer loan so you pay as little as possible into the house before you leave.
If lengthening your repayment period out to 40 years is the only way you can afford the monthly payments, then that is probably your only viable option. However, if refinancing into a new 30-year loan makes those payments affordable, then most of the other factors line up on the side of a shorter loan.
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