Are FHA Refinance Loans a Great Option Right Now?

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fha refinanceWith mortgage interest rates at historic lows, now is an excellent time to refinance an existing home loan. Refinancing makes sense for borrowers who have fixed-rate loans at much higher rates than what lenders are currently offering. FHA refinance loans are a popular option due to their favorable terms for borrowers.


What is Refinancing?

Refinancing replaces an existing mortgage with a new mortgage. The new loan may have a lower interest rate or a shorter term, helping borrowers save money in the long run. Refinancing can also help borrowers eliminate their private mortgage insurance premiums or take out cash for home improvements, making them a good option for any borrower who meets the lending requirements.


FHA Refinance Loan Overview

The Federal Housing Administration, an agency of the U.S. Department of Housing and Urban Development, doesn't give loan funds directly to borrowers. Instead, banks and other financial institutions apply to become FHA-approved lenders. Once a financial institution is approved as an FHA lender, it can grant loans to borrowers who meet the loan requirements. Banks and credit unions provide the loan funds, while the FHA insures each loan. Because these mortgages are backed by a government agency, they are less risky for financial institutions than other types of home loans.


Advantages of FHA Refinance Loans

One of the major advantages of refinancing with an FHA loan is that the FHA program has a much lower minimum credit score than most options. Borrowers with scores of at least 580 receive the most favorable terms, but FHA loans are also available to homebuyers with FICO scores as low as 500. These low minimums allow borrowers to take advantage of lower interest rates even if they've had financial difficulties in the past.


FHA refinance loans are also assumable, which means they can be transferred from one borrower to another. If a borrower's financial circumstances change, it's possible to transfer the FHA loan to someone else, which can help the original borrower eliminate a monthly mortgage payment and get their finances back on track.


Drawbacks of FHA Refinance Loans

FHA refinance loans have many advantages, but they also have a few drawbacks. One of the most significant is the mortgage insurance requirement. Most lenders require borrowers to pay for private mortgage insurance if they have less than 20% equity in their homes. Equity refers to the value of the home minus any liens against the property. If a borrower has a home worth $250,000 and a mortgage balance of $200,000, she has $50,000 in equity, which is 20% of the home's value. If she had less than $50,000 in equity, she would most likely have to pay for private mortgage insurance.


Some FHA refinance loans require a new appraisal to determine the current value of the property. The appraiser also checks to make sure the home meets the FHA's safety standards. If an appraisal is required, it can increase the amount of time it takes to close on the new loan.


Refinance Options

Borrowers who refinance an existing FHA loan with a new FHA loan can use the FHA Streamline program. It's also possible to refinance conventional mortgages, VA loans and USDA loans with FHA refinance loans. Homebuyers who want to take advantage of low interest rates and favorable loan terms should consider refinancing now.

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