Refinancing your home is a big deal. It’s not like running down the street and grabbing an ice cream cone or even going out and buying a car. It can have both positive and negative effects on your finances, and these effects will be far-reaching. The decision to refinance should never be made on a whim or because it seems like the popular thing to do. That being said, most homeowners will come to a point where they decide a refinance is necessary, particularly if they are in a tight spot financially. But the question comes up as to when. Here are a few FHA when to refinance indicators that will help to answer that question.
Foreclosure, Poor Finances, or a Mortgage that is too Much to Handle
Probably the most common reason people finance is to lower the interest rate and/or the monthly mortgage payment. A home mortgage is a big responsibility that carries a lot of weight for thirty years until the mortgage is paid off. Unfortunately, jobs aren’t always as reliable as the mortgage and too often homeowners end up in a situation where that monthly payment is more than they can handle.
When you find yourself in a tight spot financially with your home, this is a pretty good indicator that it may be time to refinance. There are federal options available that are designed to reduce your interest and your monthly payments, that’s it. That’s all they do. They are known as no cash back options. When the mortgage is more than you can handle, a no cash back loan may be the key to helping you keep your house.
Another FHA when to refinance flag is when you are underwater in your mortgage, which means you owe more on the house than it is actually worth. No homeowner wants to be here. That feels a lot like a good investment gone bad. For these homeowners there is a special type of refinance, called HARP, that will help you get back on top of the loan. With the HARP refi the lender forgives part of the mortgage debt, making the value of the home match the amount owed. There are set restrictions and guidelines to this loan, but it is a great option if you’re underwater.
Here is more info on FHA when to refinance for HARP.
The mortgage payment debt-to-income ratio is also an FHA when to refinance indicator. Most lenders like to keep the mortgage payment at 31% of your monthly income or lower, preferably lower. If you end up making less money per month than you did when you signed on the home, you’ll soon find that the mortgage is much more than that 31%. This is a good time to refinance and lower the monthly mortgage payment, making it just a little bit easier for you to pay every month.
FHA When to Refinance and Change the Terms
Refinancing because you’ve gotten into a tight spot financially isn’t the only reason to refinance. Oftentimes by changing the terms of the loan you can save money over the life of the mortgage. The terms being referred to here are the amount of time you’ll be paying on the loan and the type of loan you’re working with.
Most mortgages are signed on with a thirty-year repayment plan. Each loan has an amortization schedule which shows how much is being paid in interest and how much in principle every month. If you look at the amortization schedule you’ll notice that for the first few years of the loan, more interest is being paid monthly than principle. After about five years your payments may start to make a dent in the loan balance. By the time the loan is paid off, you will have paid at least double the amount you actually signed on for. By switching to a 15-year-loan you will pay off the loan faster and you may be able to save thousands in interest. The one downfall is that you will have bigger monthly payments. Here is a good site on FHA when to refinance for your interest rates.
And last but not least, many people refinance to switch from an ARM loan to a fixed rate loan. The ARM has a steady interest rate for a few years, but then it adjusts and fluctuates with the market trends. Sometimes it will be lower and sometimes it will be higher, but it is not reliable. The fixed mortgage, on the other hand, is one interest rate that remains the same through the life of the loan. You always know what you’re payment is going to be.
There are a lot of reasons to consider a refinance, some good and some bad. The reasons mentioned above are some of the most common reasons homeowners pursue the refinance route – a good rule of thumb to consider is whether or not the refinance will help you out financially. If it does, great, you should probably go for it. If not, you may want to consider a different avenue.