Whether or not you should refinance an FHA insured mortgage depends on the terms of the mortgage you have compared to what you would get with a refinance. A chat with a lender and a couple of quick calculations will tell you if a refinance is something to pursue. With an FHA loan as your current mortgage, you also need to choose whether to stay with FHA or go with another type of mortgage.
Reasons to Refinance
A major reason to refinance would be to lower your interest rate and monthly payment. You house payment is probably your biggest monthly expense and a lower payment can be a big help for the monthly budget. To determine if refinancing makes sense, calculate a payback period by dividing the upfront costs to refinance quoted by a lender by the monthly savings. The result tells you how long it would take to earn back the cost of refinancing. Another reason to refinance would be to draw out some equity if your home has increased in value.
Getting Away From FHA
The FHA mortgage program allows a buyer to finance a home with a low down payment. Along with that loan comes an upfront mortgage insurance premium and an annual MIP paid to the FHA. The annual cost of the mortgage insurance adds a significant amount to your monthly payment. If you home has gone up in value or you can put up cash to buy down the loan, you can get rid of the monthly MIP by refinancing to a non-FHA mortgage.
FHA Streamline Option
You can also refinance to a new FHA insured loan. The housing agency makes that option easy with its streamline refinance program. The streamline rules allow you to get a new loan at a lower rate with lower costs and no income verification or appraisal requirements. A streamline refinance must result in a lower rate and monthly payment, and you cannot get cash out from the refinance. Lenders may offer no closing cost versions of the FHA streamline refinance, making it even easier to lower your payment.
FHA Mortgage Insurance Considerations
In June 2013, the Department of Housing and Urban Development increased the upfront and annual MIP percentages. The FHA insurance costs have been increased several times since the bursting of the housing bubble in 2007-2008. If you are looking at refinancing your, older FHA loan to a new FHA loan, factor in the higher monthly MIP costs when making a comparison. If your FHA loan was originated before June 1, 2009, you can refinance at much lower MIP rates than for loans taken out after that date. However, for FHA loans assigned a case number on or after June 3, 2013, the annual MIP premium continues for the life of the loan.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.