As time wears on and financial circumstances change, mortgage payments can become increasingly difficult to meet. There are times when an extra $150 per month could make a big difference in what a family is able to accomplish. Using an FHA refinance option for a lower interest rate and/or monthly payment may allow that little bit of breathing room they need. Here is what you need to know about the process of refinancing when you hold a Federal Housing Administration loan.
What Refinancing Can Do For You
Before we go into the qualifications, let’s take a look at why so many homeowners choose to refinance their homes one or more times. One of the main reasons is to procure a better interest rate. If a family consistently pays their mortgage on time, they will be building their credit score with each payment. When their mortgage is recalculated, a better score will result in a lower rate on the loan. The amount of interest is greatly decreased and thus the monthly payment also goes down; another good reason to refinance.
It is also possible to borrow money based on the equity, which is the difference between the value of the home and how much is owed on the loan. Equity increases as payments are made. When a homeowner improves the property and increases its market value, this also adds to their equity. Credit can be used to make large purchases that the borrower could not otherwise afford.
There are three main types of FHA refinance options, tailored to the specific needs and qualifications of the individual borrower.
FHA Streamline Guidelines
This is called a Streamline Refinance because it is the quickest option with the least amount of requirements, or Paperwork, as the rest of us know them by. With this action, you can reduce the interest rate on your current home, usually without having to go through the hassle of getting an appraisal.
This option is best for those who are in a good position financially that reflects in the history of their FHA loan. Although there is no option to receive cash back based on equity, you will have the immediate benefit of spending less on your mortgage and more on other needs (have any kids getting ready for college?).
However, there is a “seasoning period” before you will be able to qualify. As of 2011, the minimum requirements for the borrower are: at least six monthly payments on the mortgage, at least six months of time passage from the first monthly payment, and at least 210 days from the closing date of the loan. Also keep in mind that the time period is sometimes longer depending on the individual lender’s preference.
Follow these FHA Streamline guidelines and your refinance will go off without a hitch!
FHA Cash-Out Refinance
If you have taken a significant amount of time to build up equity in your home through payments and property improvements, this option is definitely one to consider. With a property purchased over a year ago you can qualify to be refinanced at up to eighty-five percent of the home’s appraised value as well as the state-specific closing costs.
In simple terms this means that the borrower is taking out a new loan with better conditions to pay off the existing mortgage. The result is extra cash: $2000 or more to be used at the homeowner’s discretion. A new car, brace’s for Susan…. The possibilities are endless!
FHA Short Refinance
Believe it or not, there is even a refinance option for those who owe more on their mortgage than their home is currently worth. As long as you are current on your payments, FHA Short Refinance is an option to discuss with your mortgage provider. The goal is to adjust your loan to make it more affordable and more stable in general.
In the event that the lender agrees to this course of action, he/she will be required to lower the total mortgage amount to no more than 97.75% of your home’s current appraised value. Now the homeowner can begin building equity in their home instead of paying into a black hole that will inevitably lose them money.
If you currently hold a conventional loan but would like to switch over to FHA, keep in mind that you can qualify for an FHA Replacement Loan. The overall requirements for this type of refinancing are the same as for the Cash-Out alternative.
Whether you are seeking a lower interest rate, more affordable monthly payments, or a little cash to make a large purchase, FHA refinance provides plenty of options and answers. With good timing and a little know-how, you can reap big benefits from your home investment.