A home loan is a long-term commitment. For 15 to 30 years, you’re agreeing to pay a fixed monthly payment, but chances are, you won’t make it to the end of that period without either selling or refinancing your home. A Federal Housing Administration refinance can be easier to get, especially if you choose the FHA Streamline Refinance option, while with a conventional refinance, you may be able to eliminate private mortgage insurance.
TL;DR (Too Long; Didn't Read)
There are several benefits of FHA refinance, including that it's easier to qualify for when compared to a conventional refinance. You also have a variety of options with an FHA refinance, including the FHA Streamline Refinance program.
FHA Vs. Conventional Refinance
The same features that made a conventional loan more attractive when you bought your home also apply when you’re refinancing. Although conventional loan refinance requirements will be stricter, you also won’t have the rules that are in place with an FHA loan. When you refinance a conventional loan, it doesn’t have to be owner occupied, and you can drop your mortgage insurance, whereas you may have to keep the PMI with an FHA loan. In fact, many refinance from FHA to conventional to get out of the requirement that they pay PMI for life with a down payment of 10 percent or less.
But FHA loans have plenty of benefits over conventional loans. Initially, the qualification requirements aren’t as strict, and you can get in with a lower down payment. You can also get lower interest rates and down payment assistance, if you qualify. However, that doesn’t mean FHA is the best deal for your refinance. It’s important to weigh both options and make the switch if it’s the best option for you.
When to Choose Conventional Refinance
Before you choose either option, you need to compare interest rates. If you have poor credit, a conventional refinance may give you a better interest rate if you can qualify. The benefit of an FHA mortgage is that it’s easier to qualify, but you’ll be penalized with a high interest rate if you are seen as risky.
If the home you’re refinancing isn’t your primary residence, conventional loan refinance requirements will work better for you. FHA loans only apply to owner-occupied properties. The PMI payments on FHA loans will also drive your payments up, so refinancing to a conventional loan can help you get around that if you can’t qualify for a noninsured FHA loan.
When to Choose FHA Refinance
Those with lower credit scores may choose an FHA refinance simply for the fact that it’s easier to qualify. If your credit is in good shape, though, you may find you can get a lower interest rate than what you’re offered with a conventional refinance.
One major way an FHA refinance is superior is if you take advantage of the FHA Streamline Refinance program. With an FHA Streamline Refinance, the lender relies on the fact that you qualified previously, and your basic information hasn’t changed, to approve the refinance. That often means you can skip the credit check and appraisal requirements, and your income and debts will only be minimally reviewed.
Refinancing FHA Into Conventional Loan
For those with an FHA loan, refinancing into a conventional loan can give you access to lower interest rates, depending on your credit score and current rates. However, those benefits may be less enticing if you compare the process to the ease of using the FHA Streamline Refinance process for your existing FHA loan. Still, it’s worth looking into as an option.
The biggest reason to refinance from an FHA loan to its conventional counterpart is if you’re paying PMI for the life of your FHA loan. In this case, you could find you save serious money by making the switch. However, qualifying for a conventional refinance isn’t easy, and you’ll have to pay closing costs, which typically will be 1 to 5 percent of the loan amount.
Refinancing Conventional Into FHA Loan
One of the biggest draws of refinancing to an FHA loan is its ease of approval. Unlike conventional loan refinance requirements, FHA requirements aren’t strict, as long as you have decent credit. You may even be able to qualify if you’re unemployed.
FHA loans do have limits, though. Currently, you can only borrow up to $314,827 to $726,525, with the maximum depending on the area of the country in which you live and the type of home you’re refinancing. You’ll need to look at those limits if you’re trying to move from a conventional loan to one backed by the FHA.
FHA Refinancing Options
Another thing making an FHA loan better in the FHA vs. conventional refinance debate is the multiple loan options offered. They include:
- FHA Streamline Refinance: This loan speeds up the approval process by relying on information from your previous loan to push your application through. It can save time and eliminate the inconvenience of having to track down paperwork.
- FHA Cash-Out Refinance: Whether your original loan was conventional or FHA, you may qualify for this loan, which lets you turn your equity into cash. You’ll need at least an 85 percent loan-to-value ratio to qualify.
- FHA No-Cash-Out Refinance: This type of loan simply states that you’re refinancing without taking any cash out.
- FHA Short Refinance: If you’re in a situation where you’re underwater, simply meaning you owe more than your property is worth, you can refinance using this option to try to equalize your debt to the home’s current market value. There’s a strict set of criteria to qualify for this type of refinance, though.
Interest Rates for Refinancing
As you’re comparing FHA vs. conventional refinance, you’ll probably find that you’re taking interest rates into account. Every percentage point counts when you’re paying monthly. If you have a 30-year loan with a 5 percent interest rate, you’ll pay more than $186,000 in interest on a $200,000 loan over those 30 years. Take that down to 4 percent, and you’ll pay just over $143,000.
The rates you pay will vary between conventional and FHA loans. FHA loans follow current market conditions, while also factoring in your credit score and other information, so those who have decent credit will probably find the rates are competitive with conventional mortgage rates. Although conventional rates also vary according to market conditions, you’ll typically find they’re higher, so it’s important to weigh that against the money you’ll save by not having to pay PMI.
Is It Wise to Refinance?
The truth is, refinancing isn’t always the best option. You’ll read many rules of thumb when it comes to refinancing, including the theory that you shouldn’t refinance unless you can lower your interest rate by at least 2 percent. But some lenders say you should start thinking about refinancing at a savings of 1 percent or more.
The biggest factor in deciding whether or not to refinance is the closing costs you’ll pay. On average, you can expect to pay between 3 to 6 percent of the amount you’re borrowing, which averages $4,876 per transaction nationwide. If you have an FHA streamline refinance loan, though, you may be able to get a lower closing cost, as those average between $1,500 and $4,000.
One thing to ask yourself before refinancing is whether you plan to remain in the home for at least a few years. If you’re moving soon, those closing costs won’t make up for the savings you’ll get from refinancing for a lower interest rate. If, on the other hand, you’re refinancing to consolidate other debts or eliminate PMI, the numbers may add up. As long as you factor in closing costs as you’re determining whether it’s worth it, you’ll be able to figure out if the math works in your favor.
- The Lenders Network: Why You Should Refinance Out of FHA into a Conventional Loan
- Nerdwallet: FHA Loan Limits for 2019
- Investing Answers: Loan Interest Calculator: How Much Interest Will I Pay My Lender?
- Lending Tree: Understanding Mortgage Refinance Closing Costs
- My Mortgage Insider: FHA Streamline Refinance: Negotiate Zero Out-of-Pocket Closing Costs
- The Lenders Network: Comparing FHA vs Conventional Loans – Which is Right for You?
- Bankrate: How to Get Rid of PMI, or Private Mortgage Insurance
- HUD.gov: Streamline Your FHA Mortgage
- Mortgage Calculator: When To Refinance
- GoBankingRates: When to Choose an FHA Refinance Over a Conventional Mortgage
- Interest.com: Make Tough Refinancings Work With an FHA Loan
- Investopedia: When (and When Not) to Refinance Your Mortgage
Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.