When you refinance your home mortgage there are always pros and cons. This is the case whether you’re refinancing through a conventional lender or whether you are going FHA. However, when FHA Refinancing a mortgage there are a few benefits – and downfalls – that you won’t come up against if you go through a traditional lender. Here some of the most common pros and cons that you should be aware of prior to refinancing.
Benefits of FHA Refinancing a Mortgage
The Federal Housing Administration is a government program that helps homeowners that have low credit and imperfect financial histories get ownership of their home or keep their existing home. The greatest benefits you will experience when FHA refinancing a mortgage are the immediate financial perks. Homeowners who are unable to qualify for financing through a conventional lender can typically find a federally approved lender willing to take them on as a risk. While you do have to have some credit history and a credit score that’s decent, you won’t be required to have a score in the seven hundreds to be considered for approval on a decent loan. In fact, FHA loans are better suited for people who don’t have perfect credit and financial history.
In addition to the high approval rate, securing a federally insured loan can be very affordable. In many cases the down payment can be as low as 3.5% of the loan value, as opposed to ten or twenty through a conventional lender. This is a significant difference and for many homeowners is the key to making or breaking their possibilities of getting a loan. On top of this, the interest rates are typically comparable with standard market rates, so even if you have a lower credit score you may not end up with an astronomical rate.
When securing FHA financing on a home that is in disrepair, you can often refinance using a special loan that allows you to fix up the property. This is typically best discussed with your lender, but there are refinance programs available for fixer uppers which are definitely worth considering. On top of this, because environmental responsibility is such an important issue, you may be able to receive help with home improvements that make the home energy efficient.
Cons of Using FHA to Refinance Your Home Mortgage
While there are many benefits when FHA refinancing a mortgage, there are also cons that have to be considered. First, while more people are approved for a loan through federal lenders than conventional lenders will approve, this doesn’t mean that all potential homeowners will. Your financial state will affect whether you are approved so if your credit and financial history are terrible, you may not be able to qualify.
It was mentioned above that the interest rates are competitive, and this is true. However, because FHA homeowners are typically dealing with poor credit the interest rates are not always as low as they would be if you had perfect credit and were dealing with a conventional lender. However, while the rate is impacted by your finances, it is not a significant impact and certainly not high enough to scare you away from the loan.
Perhaps the greatest disadvantage when FHA refinancing a mortgage is the fact that you will have to pay private mortgage insurance. To be fair, this is typically required on conventional loans as well, at least until the homeowner has 20% equity, but with recent changes to the law FHA loans now have to have this insurance for the life of the loan. The cost of mortgage insurance is paid with your mortgage payment and will increase the final bill.
Last but not least, FHA loans have maximum limits. They aren’t for the wealthy to go buy a mansion. They are for the average American trying to purchase an average house, so the limits are typically within the average home range. Now, these limits change depending on the area you are purchasing in, but don’t expect to receive federally insured funding for a home that is valued significantly higher than the average home in the area.
While there are pros and cons to every refinance situation, as a homeowner you just need to determine whether or not the cons outweigh the benefits that you’ll experience from the refinance. Oftentimes refinancing can save enough money that the downfall is outweighed by the financial savings. So weigh the risks and benefits, but in the end what matters is your financial stability.