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The Ins and Outs of FHA Loan Refinancing

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An FHA loan refinance can be a great way to change your existing mortgage to meet your current financial goals. Whether you want lower monthly payments, lower interest expenses or cash in your pocket from your home’s equity, there’s an FHA loan refinancing option for you.

An FHA loan refinance can be a great way to change your existing mortgage to meet your current financial goals. Whether you want lower monthly payments, lower interest expenses or cash in your pocket from your home’s equity, there’s an FHA loan refinancing option for you.

What is an FHA Refinance?

An FHA refinance allows you to save money by replacing your existing home mortgage with a new FHA mortgage with better interest rates and terms.

Typically, homeowners applying for an FHA refinance already have an FHA mortgage, and they want to change the loan terms to better suit their current financial needs. By obtaining financing with a lower interest rate, you could reduce your monthly mortgage payment and save money.

Read on to learn about the various FHA refinance loans available.

Additionally, it's important to understand the distinction between cash-out and non-cash-out refinance when deciding on the best loan for your needs.

An FHA non-cash-out refinance is a type of refinancing that adjusts your interest rate and terms of the mortgage, while FHA cash-out refinances give you a way to access funds for other purposes. Maybe you need to renovate your home, pay off other debts, cover unexpected expenses or write off negative equity. Cash-out refinances allow you to use funds for these purposes.

The similarity between these two types of loans is that your FHA-approved lender is issuing a new loan to pay off your old one. So there is a transfer of funds no matter how you refinance. Deciding on cash-out versus non-cash-out refinance depends on your particular needs. We'll let you know whether the FHA refi loans discussed below offer a cash-out or non-cash-out option.

FHA Simple Refinance

An FHA Simple Refinance is a non-cash-out option for owners with an FHA loan who want a lower interest rate, are interested in moving from an adjustable-rate mortgage to a fixed-rate one or who want to remove one of the borrowers from a current loan.

With FHA Simple Refinancing, you can roll the cost of the refi into your new loan, so you don’t have to pay any costs out-of-pocket.

To qualify for an FHA Simple Refi, you need to:

  • Have an existing FHA loan

  • Be current on your payments and have an acceptable history of on-time payments

  • Meet the credit and income requirements for the new loan

  • Have the home appraised

FHA Streamline Refinance

An FHA Streamline Refinance is the quickest and easiest way to refinance your existing FHA loan into a new FHA loan with a lower interest rate.

This non-cash-out refinance option minimizes the paperwork typically associated with a refi. The FHA doesn’t require a new credit check, income verification, or appraisal for a Streamline Refinance (but the exact requirements are at each lender’s discretion), making the process much smoother than the standard refi.

To qualify for an FHA Streamline Refi, you need to:

  • Have an existing FHA mortgage

  • Show at least three months of on-time mortgage payments

  • Have at least 210 days since your home purchase or last refinance

  • Prove that there is a clear monetary benefit to refinancing by getting a lower interest rate, reducing your total interest expense, or both

FHA Rate and Term Refinance

FHA Rate and Term Refinancing is a non-cash-out option for owners who don’t qualify for a Simple or Streamline option but want to refinance to an FHA mortgage. Maybe you have a USDA or conventional loan, but could get more favorable terms by switching to an FHA loan.

In this case, an FHA Rate and Term Refinance is a good option for you. To qualify for an FHA Rate and Term Refi, you need to:

  • Meet the credit and income requirements for the new loan and

  • Have the home appraised. Unlike other FHA loans, the FHA Rate and Term Refi doesn't require an on-time payment history over a specified period. But keep in mind that individual lenders might have their own requirements.

FHA Cash-Out Refinance

As the name implies, an FHA Cash-Out Refinance is a cash-out option. If you need cash in your pocket, this is the way to go.

To qualify for an FHA Cash-Out Refi, you need to:

  • Meet the credit and income requirements for the new loan,

  • Have the home appraised,

  • Live in the home as your primary residence,

  • Have an acceptable history of on-time payments (typically 12 months), and

  • Have enough equity in your home (typically maintaining at least 20% equity in your home).

FHA Short Refinance

FHA Short Refinancing is for homeowners with negative home equity. This means you owe more on your home than the home is worth. This is only an option for borrowers with non-FHA loans who want to refinance to an FHA loan.

This was a helpful option in the 2010s when home values temporarily dropped. But with home values on the rise over the past several years, it’s rare to find a homeowner with negative equity today.

Is an FHA refi good for you?

Whether or not an FHA refinance is right for you ultimately comes down to your unique financial situation. If you’re not sure which refi type is best for you, you can always contact us here at Paddio to determine the right refinance option for you.

Written by:
Kelly Ranft
Loan Officer Development NMLS #1728619

Kelly’s extensive background in the banking industry and bachelor’s degree in finance helps her serve as an FHA and Conventional home loan expert while co-leading Paddio’s production training team.

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