When you go to refinance your mortgage you’re going to be faced with a lot of refinance options. There are many options because not every person is going to benefit from one cookie cutter, across-the-board refinance. Some of these refinances can be acquired through FHA and some will be acquired through conventional lenders. What you will want to do is determine which refinance is going to benefit you the most, and then find the lender that will be willing to work with you to make the refinance happen.
FHA Refinance Options
The Federal Housing Administration has been around for a long times and it has been the means for thousands and thousands of people to get into a home or make better use of the home they have. The biggest benefit this administration can boast is that it makes it possible for people who are dealing with imperfect financial situations to qualify for a loan regardless of their financial blueprint. To better serve struggling homeowners the federal government created a variety of refinance options. Each option is unique and serves a different type of homeowner.
The first option is the streamline refinance. This refinance is for homeowners who are in good standing on their loan, who aren’t underwater in any way, and who simply want to reduce the monthly mortgage payment and the interest rate. The homeowner must also have a loan that was acquired through a federal lender.
The second government loan option is the cash-out refinance, which is an option for homeowner’s who have equity in their home that they want to use elsewhere. This refinance will not reduce your loan amount, rather it will increase it. You may end up with a higher monthly payment, but you should be able to reduce your interest rate depending on your credit score and the current running rate.
There are also options for homeowners who are underwater on their mortgages, meaning they owe more than the home is worth. There are two different programs. One is for homeowners who have existing federally insured loans, one is for homeowner’s with conventional loans. The program for those with FHA loans is the short refinance program. With this the lender agrees to forgive part of the debt and the loan amount is reduced. The second program is HARP – Home Affordable Refinance Program. This is similar to the short refinance, but it is for homeowners with existing conventional loans. With both of these options you cannot be behind on your payments or in default.
Refinancing with Conventional Underwriting Guidelines
While the Federal Housing Administration has a lot of refinance options for homeowners, they aren’t always the best option. In many cases you will find a better deal if you go through a lender who follows the underwriting guidelines of Freddie Mac and Fannie Mae. Typically speaking, however, you will need to have a credit score at least in the seven hundreds if you want to get a competitive interest rate. While this isn’t always the case, it’s definitely better for you if you have a good high number on your credit report.
The benefits of the conventional refinance is that you can cash out the equity or you can get a cash-in refinance, where you simply adjust the terms of the loan to better suit you. You may be required to pay mortgage insurance, but once you hit 20% equity this can often be removed. This isn’t the case for federally insured loans, which require mortgage insurance for the life of the loan.
When refinancing you want to be aware that there will always be costs involved. In some cases you can get a no-cost refinance, but even that is tricky because it doesn’t mean that you don’t have to pay closing costs; it simply means that the costs will be rolled into the loan and paid off over time. So keep in mind that when you refinance you will have to pay thousands of dollars in fees and closing costs either up front or added into your loan. Because of this you want to make sure the financial benefits are going to be worth it for you. Always track your bottom line and calculate the time it will take you to break even on the refinance.
As a good rule of thumb the refinance should reduce your interest rate, your mortgage payment, your loan length, and your bottom line if it is going to be considered a good deal. Granted, if you get a shorter loan length you may end up with a higher mortgage payment, but this is where your bottom line comes in. If you are able to shave thousands off the loan than the increased payment will be worth it. With so many options available to you, you should be able to find one that will work for your needs.