When you first purchase a home through the Federal Housing Administration, you typically do not have very much equity. Whatever down payment you paid originally is probably the extent of it. However, after owning the home for a few years, you’ve paid down the loan and now you have equity. At this point you can stick with your original mortgage and keep paying off the home until, at the expiration of the loan, you own the home free and clear. Or, you can refinance the home and pull out the equity. There are many reasons why people decide to redo their loan. Sometimes they choose this so they can pull out the equity, other times it is because the FHA refinance rates are lower than the rate they currently have. Whatever the reason, it’s best to really consider your options before you take this step.
Why People Choose to Refinance
As you pay down your home loan, the equity in the house increases. This is the most common reason people choose to redo their loan. Those thousands of dollars in equity are extremely tempting. They can mean a vacation or that new car that you just have to have. But while it’s tempting, unless you have a good plan for that equity, it certainly isn’t wise. You don’t want to pull out your equity just to wind up in more debt. Now, that equity is also tempting because it can be used to upgrade the home or to roll into other investments. This is another reason people revamp their loans. They put that money to good use, where it can work for them. Upgrading your home means that the value of the home will increase and your equity will go up again. Using equity money to widen your investment portfolio may also be smart. Yes, your home is maxed out, but the investments can potentially bring in a great profit. The key is to research this decision and any decision regarding your home, so you don’t do something you’ll regret later.
Of course, pulling out the money for other purposes isn’t the only reason people choose to a refi. It’s not uncommon to purchase your home at a set interest rate, only to have the rates drop a few years down the road. People revamp their loans when FHA refinance rates drop. While the adjustment may take some work initially, if the FHA refinance rates go down even one percent, you can save thousands over the life of the loan. Revamping your loan at this point may very well be to your best interest. Still, it’s best to do plenty of research and come to the table informed, rather than making a rash decision.
Requirements for Refinancing Through the FHA
When you choose to redo your loan you’ll be able to do so through a conventional lender or a federally insured lender. The choice you make will be determined by your financial situation. If you have a high credit score with a solid payment history and low debt to income ratio, you’ll probably be better off going through a traditional lender. However, if your finances are in need of some work, you may have a better chance going through the federal program. You do not have to own an FHA loan initially to refi through the federal program. If you already have a federally insured loan, you may be able to do a streamline refinance. However, you can switch your conventional to a federally insured loan at any point in time, as long as you can qualify. The requirements include:
- Debt to income ratios: To qualify for a refinance you cannot have more than 41% of your monthly income going to bills. Only 29% of this income can be allotted for the home.
- Proof of Employment: You need to show that you have worked for the same employer for at least 2 years.
- Credit history: This can be blighted to a degree, but you need to have a steady payment history and credit improvement over the past two years. The actual credit score will vary per lender.
These qualifications that are mentioned are for those homeowners that are switching over to a federally backed loan. If you already have an FHA loan, you can do a streamline refinance, which will enable you to take advantage of lower FHA refinance rates without all of the hassle that comes with switching a conventional loan.
It’s always smart to be aware that when you revamp your loan you are increasing your debt and extending the life of the loan, so you will be paying on it longer. These options are there for your benefit and when used wisely, you can benefit. However, a refi isn’t just a chance to get some play money, so think long and hard before making this choice.