Many people have FHA loans that were issued a few years ago under poor credit
conditions. These “sub prime” loans have a much higher interest rate than what would
now be offered. If you currently have a high interest rate on your FHA loan, now is a
good time to research your refinance options.
Your options will depend on your goals. As with most other mortgage programs you will
most likely (depending on credit, income and equity in the home) have the option to take
cash out to pay off debt or spend as you please. Taking cash out is a convenient way to
pay off high interest debt and reduce your monthly obligations. Analyze your existing
debt and consider your repayment rate. Currently, you can expect to pay slightly over
$5.00 per thousand borrowed on your mortgage. In many cases you may be paying over
$20.00 a month per thousand on high interest credit cards.
Refinancing with cash out on an FHA loan will allow you up to 85% loan to value ratio.
Not only would you have a lower rate than before, you would also have fewer monthly
payments to make and an improved cash flow situation.
But you may have no need for extra cash on hand or for paying off credit card debt. If
your goal is simply to refinance your current mortgage in order to get a better interest
rate, you’re looking for what is called a “rate and term” refinance. The advantage of
a rate and term is a lower rate with a lower monthly payment. You should pay careful
attention to your current situation and compare the new loan to the existing loan.
While your rate and payment will most likely reduce, you will be resetting the clock
on your mortgage. If you have made payments over the last 5 years then you have 25
years to go on your current mortgage. Refinancing at 30 years for a lower rate will
stat the clock again. Your overall savings and benefit should outweigh this term reset.
The third option you will have is called an “FHA Streamline”. This is only available if
you already have an FHA loan. The “streamline” refers to the amount of documentation
that goes into the loan application and approval process. Many people have confused the
meaning of this term and assume that the Streamline process is a “no cost loan”. This no
cost option is offered by certain lenders but it is not relevant to the Streamline loan itself.
The lender offers a higher interest rate than you would otherwise receive in order to cover
the costs of the refinance.
To qualify for a Streamline loan there are several guidelines that must be met:
- You must already have an FHA loan and you must refinance into a new FHA
loan. This program does not apply to conventional loans.
- Your loan must be current.
- The Streamlined loan must result in a lower monthly principal and interest
payment than the loan being refinanced.
In situations where your primary goal is to reduce your monthly mortgage payment, the
Streamline option is an obvious good choice to consider. But don’t forget to weigh the
reduction in payment with the new 30 year term. In many cases, you will find that the
savings greatly outweighs the new time commitment.