When you think of refinancing a home, most homeowners think of the refinance as a way to pull out the equity to use for other things. While this is definitely an option, it’s not the only reason people refinance. In fact, there are many refinance programs out there that won’t allow you to pull out the equity. Instead, they are there to help you lock in a loan that works better for your financial situation. The FHA offers three types of refinances – cash out, no cash out, and the streamline option. The FHA rate and term refinance is known as the no cash out option.
Qualifications for the No Cash Out Refinance
The rate and term refinance can be used by homeowners who have existing federally insured loans, or they can be used by homeowners with conventional loans who want the advantages of federally backed financing.
In order to qualify for the FHA rate and term refinance, you need to be current on your existing mortgage payments. You will also need to have some equity, but not much. All you need to qualify is 3.5% equity in the home. This is because you aren’t trying to pull out any cash, what you are trying to do is alter the terms of the loan to make it more workable for you. This may include adjusting the mortgage payment, reducing the interest rate, or both.
In addition to these requirements, you will need to meet the base qualifications for all FHA loans. Your home will be appraised and your financial situation will be studied to determine whether or not you are a candidate for a federally backed loan. Don’t let this make you nervous, however, as the requirements for a loan through a federally approved lender are much less stringent than a loan through a conventional source.
Calculating the FHA Rate and Term Loan Amount
The new mortgage with the no cash out refinance will include the amount of the existing mortgage plus a few additions, should they become necessary. These additions include the amount of first liens and junior liens that are more than 12 months old. They also include repairs required by the appraisal, closing costs, prepaid expenses, and in some cases a second mortgage if there is one. The interest that will be accrued on the late payment to the original lender, due to the refinance, will often be added to the loan as well.
In many cases fees and penalties that come with pre-payment, late payments, prepaid expenses, or escrow charges will be added to the final total as well. These possible additions will need to be discussed with your loan officer, of course, but they may be options for the loan. Once everything has been calculated, if there is a refund coming to the homeowner for UFMIP than that refund will be deducted from the total.
The no cash out refinance operates much like a traditional loan, in that the homeowner is required to do all of those things necessary for a first time buyer loan, including an appraisal and closing costs. However, though these things are necessary and the expenses will be paid by the homeowner, with the way this particular refinance is structured, it’s not uncommon for the homeowner to complete the transaction without paying any money out of pocket up front. In addition, due to the way the underwriting works, there are some cases where there is a little extra cash floating around after everything has been completed. Usually the sum is very little, but the homeowner can receive up to $500.00 cash back if the underwriting has allowed for that small bubble. The expenses incurred while finalizing the refinance will simply be rolled into the loan and the homeowner will pay it off monthly as he pays down the loan.
If you are looking for a cash out refinance than this loan is not for you. You will want to look at other options, either through the federal programs or through a conventional lender. However, if you are looking to adjust the terms of your loan either to make it more manageable for you, or to take advantage of lower interest rates, than the no cash out refinance or the streamline refinance may be options you will want to consider. As with any major real estate purchase, you will want to discuss the options with your loan officer to determine whether or not you will benefit from the FHA rate and term refinance.