FHA Loan Refinancing: Tips and Hidden Costs
Point of Interest
Refinancing an FHA loan comes with many of the same hidden fees that a new mortgage brings on closing. Don’t let yourself be surprised by things like closing costs and up-front insurance premiums.
Navigating the process of refinancing your mortgage can feel like walking through a hedge maze. There is so much technical jargon, and, typically, your FHA loan closing costs add up. It’s hard to come out of a plan to refinance FHA to a conventional loan without a skinned knee, but our breakdown as long as you know your refinancing options and possible fees, you need to make it through the process should come out unscathed.
What is an FHA loan?
If you don’t have a lot of cash saved up but want to buy a house, you might look into an FHA loan. A Federal Housing Administration (FHA) loan targets low- to middle-income homebuyers who may not have the best credit score. You can get a loan from the FHA by shelling out as little as 3.5% of the home price for a down payment.
An FHA loan refinance can provide lower monthly payments, so your mortgage would be easier to afford and lower costs to close on the loan. However, you will be stuck paying mortgage insurance for the life of the loan. To apply to refinance to an FHA loan, you can contact several mortgage lenders to see if they offer the best interest rates.
How to refinance your FHA loan?
There are several interesting ways to refinance your FHA loan, and each provides its own perks. You can refinance either a conventional mortgage or an FHA loan into an FHA loan. The process pays off your old mortgage, releasing you from that contract, and transfers your debt to an FHA loan. If you already have an FHA loan and can prove you qualify, you could try the FHA streamline option, which can save you time.
- FHA cash-out refinance -— Use this refinancing method when you need cash on hand for a renovation project or to pay off debt. It gives you cash in hand after you take out a mortgage for more than you owe on the house. If you have at least 20% equity in your property (and a new appraisal shows it), you can get this type of loan.
- FHA simple refinance -— When using the simple refinance option, you can replace your previous FHA loan with a new one. This method requires a credit check and an appraisal, and you can’t get cash back from refinancing.
- FHA streamline refinance -— This choice is considered “streamlined” because you can skip the appraisal step, which is necessary for other types of FHA refinancing. To qualify, you must be up-to-date with on-time mortgage payments, have a mortgage that is at least six months old, and you must be able to prove that it benefits you (either through a shorter mortgage term or lower monthly payments, or both).
- Refinance FHA to conventional loan refinance -— If you’re tired of paying mortgage insurance, you could switch to a conventional mortgage through a refinancing process. To refinance FHA to traditional, you need to have a high enough credit score and debt-to-income ratio to qualify.
Hidden Costscosts in FHA Loan Refinancingloan refinancing
Refinancing your mortgage is a big decision. There are charges you’ll have to pay that you may not realize upfront. Be sure you understand all the expenses involved in the refinancing process before moving forward. For example, you’ll have to pay FHA funding fees, including an upfront funding fee of 2.25% of your total mortgage and your monthly insurance premium.
Here’s a breakdown of other hidden costs when you refinance an FHA loan:
- Interest -— If you close on the first of the month, you’ll have to pay interest for the entire month when you close. Keep this in mind when coming up with your total closing costs.
- Origination fees -— Lenders charge these fees to cover the expenses of processing your loan and obtaining a credit report. You can negotiate them, but it raises your closing costs further.
- Insurance premiums -— Unless you put 20% down on your mortgage, you have to pay a monthly insurance premium for the life of an FHA loan. Paying for that much longer might cost you a lot more money than the mortgage insurance on a conventional loan that you can remove after paying 20% of the home loan.
- Appraisal and inspection fees -— To refinance a home, you have to get it appraised again, which can cost several hundred dollars. The same is true for the inspection of the house.
Ways to Avoid Hidden Costsavoid hidden costs in FHA Loan Refinancingloan refinancing
There are interesting strategies that can help you avoid paying more than you expect when you go to close your house. Take each of these into consideration when refinancing your loan.
- Wait until the very last day of the month to refinance your loan. When you close, you have to pay the first month’s insurance upfront. If you close the first of the month, you’ll have to pay that entire month in cash. Pushing it as late in the month as possible helps lower your closing costs.
- Save for a 20% down payment. If you can, wait to buy a house with an FHA loan until you can afford to pay the 20% down payment. This will save you thousands over the life of the loan because you won’t have to pay mortgage insurance until the loan is paid in full.
- Shop around for everything. Rather than relying on the suggestions from the lender, look for your own inspectors, appraisers, and insurance companies. You might be able to find professionals willing to do the job for less.
Other tips and tricks for FHA loan refinancing
When you refinance an FHA loan, you can add up to $6,000 of energy-efficient upgrades to your home. You can put these expenses on your home loan, and it may be a wise decision. A more energy-efficient property can save you loads of money on monthly bills. Even adding a programmable thermostat can save you $180 every year.
The final word
From FHA funding fees to FHA loan closing costs, refinancing your loan can incur a lot of unexpected expenses. Make sure you research all of the hidden fees that will come with your loan. However, as long as you prepare for your refinance with the same enthusiasm that you would when applying for a new mortgage, you should be set up for success.