FHA Refinancing Options Attract More Homeowners: Refinancing with FHA Explained

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Calculators for Mortgages Columnist

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Regardless of what kind of mortgage you used to buy your home, consider letting FHA refinance your property. Recent changes to FHA limits and loan requirements make it easier for more homeowners to qualify for government-backed refinance deals. FHA refinance programs have attracted significant attention from the media and from homeowners hoping to lock in today's lower mortgage rates. Officials at one professional association of community bankers estimated that 80% of their home loan volume in the first quarter of 2009 involved refinancing. FHA loans tracked by the same group rose four times from the same period a year ago.

FHA Refinance Offers Relief from Rising LTV Ratios
With real estate values dropping by as much as 35% in formerly hot real estate markets like Tampa, many homeowners have been unable to find refinance deals from conventional lenders. Those loans limit their loan-to-values to 95% but they are almost impossible to get because credit score requirements from mortgage insurance companies have become extremely restrictive. Homeowners with imperfect credit and less than 20% equity will probably do better with an FHA loan. Government assurance allows FHA lenders to consider rate and term refinancing for properties with as little as 3.5% home equity.

What FHA Lenders Look For in Refinance Deals
According to recent press reports, a growing number of FHA lenders want to use the refinancing process to remove so-called "toxic loans" from their books. Although an FHA mortgage with no missed payments might not seem toxic, a home with negative equity can cause serious problems for underwriters and insurers.

FHA Refinance Options
Choosing the best FHA home loan depends on your personal financial situation. FHA lenders offer three kinds of refinancing packages:

• Cash-Out Refinancing works the same for FHA home loans as for conventional mortgages. Borrowers with rising home equity can reset the clock on a mortgage, locking in a lower interest rate while converting some of that equity into cash--up to 85% of the value of the home.
• Streamlined Refinancing offers eligible borrowers the chance to lower their interest rates and reduce monthly payments with far less paperwork than typical refinance deals. If you already have an FHA loan, a streamline refinance allows you to get a lower rate without reappraising the property if you pay your closing costs upfront--great if its value has dropped and you are underwater. In addition, a streamline refinance doesn't require great credit. As long as you are current on your loan, have not blown off any federal debt, and are still employed, you can streamline into a new FHA loan.
• Rate/Term Refinancing programs allow borrowers to refinance a non-FHA mortgage with an FHA lender. Homeowners who previously qualified for low mortgage rates without government assistance may require FHA backing when refinancing a home in a challenged real estate market.

Pros & Cons of FHA Refinance Deals
As with any home loan, an FHA refinance carries both benefits and costs. Personal finance experts often advise their clients to pay attention to the fine print in three specific areas:

• Closing costs. FHA loans involve closing costs like any other mortgage. In fact, a refinance can cost more because there is no seller to split the costs with.
• Monthly insurance. FHA loans require monthly insurance on all loans except its 15 year mortgages with at least 10% equity. This monthly premium is charged until the loan-to-value drops to 78% or less. Mortgage calculators can help you determine whether a new monthly payment that includes insurance premiums can save you money compared to your current home loan.
• Mortgage Insurance premium (MIP). HUD requires a 1.5% upfront MIP. Many FHA lenders roll these fees into a home loan's principal. If refinancing a HUD loan, the MIP that you paid the first time will be credited toward your new MIP policy.

Mortgage refinance calculators become even more important tools when homeowners consider FHA financing as an alternative to conventional home loans. By factoring in closing costs and administrative fees, prospective borrowers can determine if a government backed mortgage is a smart choice to improve their cash flow.

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Date :2009-06-25