Refinancing your mortgage may save you money in the long run, but it still isn't cheap. Just as with an original mortgage, lenders bill homeowners several thousand dollars in closing costs. Choosing well between a conventional loan and one insured by the Federal Housing Administration can reduce some of your refinancing expenses.
If you already have an FHA mortgage and you've been current on your payments for a year, you can "streamline" your refi by going with FHA. Refinancing requires a lot of paperwork to prove you're a good risk for the lender; with a streamlined refi, you can get a loan without verifying your income, your credit score or your employment. This makes it easier for you to cut your monthly payment to something affordable, even if you have poor credit and a low-paying job.
When the FHA backs a loan, it guarantees to cover the lender's losses if you default. To cover its own costs, the FHA then requires that you buy mortgage insurance. Lenders may require insurance for non-FHA loans, but FHA requires you pay for some of the insurance up front and keep paying the premium for five years. Conventional loans, which only need two years of premiums, may turn out cheaper. If you qualify for a streamline refi, however, you get lower insurance premiums and smaller upfront costs.
Before you get a conventional refi, you have to get an appraisal -- and if your house appraises for less than the mortgage amount, lenders won't touch you. If you go streamline, the FHA lets you use the purchase price or the most recent appraisal to set the value of your home, even if the market in your neighborhood is sinking. According to the FHA, a typical borrower can save as much as $3,000 per year with streamlining.
If you have a conventional mortgage now but want to refinance with FHA, you have to complete all the refi paperwork that streamlining lets you skip. Another drawback is that FHA raised insurance rates starting in 2012 on most non-streamline refinancing. Even so, FHA refis offer one advantage: If you sell the house later, the buyer can assume your mortgage with its low interest rate. That's an asset when you want your home to stand out in the marketplace.
- Federal Reserve Board: A Consumer's Guide to Mortgage Refinancings
- Realty Times: Obama Administration Cuts FHA Refinancing Fees, Three Million Homeowners Could Benefit
- Housing and Urban Development: Streamline Your FHA Mortgage
- The Mortgage Reports: The New FHA Streamline Refinance ...
- Bankrate: Refinancing Into a Conventional Mortgage