July 30, 2024
An FHA refinance replaces your existing mortgage with a new one. It is sometimes used to obtain a loan with more favorable terms or get cash out at closing time but an FHA refi loan can also be done to exit a conventional loan or an adjustable-rate mortgage.
Borrowers are commonly motivated to refinance to get a lower interest rate, to shorten their loan term, or tap into their home equity.
The FHA offers several refinance programs tailored to different needs. Which one is right for you?
FHA Rehabilitation Refinancing
The FHA 203(k) rehab refinance loan program enables you to borrow extra funds for home renovations or repairs. This can help if you want to refinance and upgrade your home simultaneously. You can refinance a conventional loan or an existing FHA mortgage with the FHA 203(k) rehab loan.
Remember that money for the renovations is approved under this program, but it does not pass to the borrower. Those funds go into escrow and are paid as “draws” directly to the vendor or service provider.
These FHA refi loans are available for purchases and refinances, so depending on your needs, explore both possibilities with your lender.
FHA No Cash-Out Refinance
With this option, the new FHA mortgage pays off the existing one. But it does not allow any cash back to the borrower at closing except for refunds of items paid up front but later financed into the loan.
An FHA no-cash-out refi loan can help you adjust your mortgage term, get a lower interest rate when conditions are right, or transition from an adjustable-rate to a fixed-rate mortgage.
The FHA offers three distinct no-cash-out refinance programs:
- Rate and Term Refinance: This program allows you to modify your interest rate, loan term, or both. It’s a great choice for making your monthly payments more affordable or accelerating your payoff schedule.
- Simple Refinance: Designed specifically for refinancing existing FHA-insured mortgages, this option offers the same benefits as the rate and term refinance but is exclusively for FHA loans.
- Streamline Refinance: This is a simplified refinance option for FHA-insured mortgages. It stands out for its reduced paperwork and relaxed credit requirements. You can choose between two streamline options: Credit Qualifying, where the lender assesses your creditworthiness but doesn’t mandate a new appraisal, and Non-Credit Qualifying, where neither a credit assessment nor appraisal is required.
FHA Cash-Out Refinance
This option replaces your existing mortgage and offers cash back based on the equity built up in your home over time.
On closing day, after covering the loan’s fees and charges, you receive an amount in cash that can help you tap your home equity for various needs, such as home improvements, debt consolidation, or educational expenses.
FHA lenders typically set requirements regarding the amount of home equity and the number of mortgage payments made before you can apply. It’s advisable to consult a participating lender to understand their specific rules.
What To Remember
Not all lenders offer all FHA loan options. Some lenders may have higher FICO score requirements than others, so it pays to shop around.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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