FHA Home Loans for Debt or Mortgage Consolidation
May 02nd, 2010Too often when looking to consolidate debt or mortgages, homeowners–or their lender–only consider conventional loans. With the decline in home values and tightening of underwriting for conventional mortgages and private mortgage insurance, many homeowners would be better served using an FHA home loan. The primary argument against using FHA mortgages is the mortgage insurance premiums paid on FHA mortgages. However, depending on your equity, funding an FHA refinance mortgage up to 85% of your home’s value may save you considerably more money than the cost of the mortgage insurance. With the help of mortgage calculators you can see for yourself if using a FHA home loan for a debt consolidation mortgage refinance makes sense for you.
Mortgage Insurance
Conventional mortgages require mortgage insurance on loans that are greater then 80% of the property’s value. On these mortgages, the approval for the loan is made by an underwriter for the private mortgage insurance company insuring the mortgage. Depending on what state you are in and the type of property you have, private mortgage insurance may or may not be available. If private mortgage insurance is available in your state and for your property type, for cash-out refinances the mortgage insurance premium can be as high as 0.6% or even higher. For a $100,000 loan balance, that is $50 per month or more ($100,000 x 0.006 = $600 divided by 12 = $50 per month).
For FHA home loans, there are two types of mortgage insurance you will be charged. First is the upfront mortgage insurance premium that is 2.25% of your mortgage and usually rolled into the loan balance: if you have a $100,000 loan amount, your FHA home loan with the upfront mortgage insurance is $102,250. If your mortgage is $250,000, with the upfront mortgage insurance your FHA home loan will be $255,625.
Next is the monthly mortgage insurance premium–currently 0.55% of the mortgage balance paid monthly. The monthly mortgage insurance is not calculated on the total loan amount but on the “base” loan amount ($100,000 or $250,000 in the examples above). To calculate the monthly premium: take the base loan amount, multiply it by 0.55%, and divide by 12 months in the year. For instance: $100,000 x 0.55% = $550 divided by 12 = $45.83 per month.
Payment Calculation
Does it make sense to use a FHA home loan to consolidate your debt or your current first and second mortgages into one payment? Calculate the monthly payment of an FHA home loan using an amortization calculator:
Is this amount less than what you are paying now on your current mortgage plus any other debt you wish to consolidate? If so, you may benefit from a FHA home loan for a debt consolidation.
Mortgage Rate Can Be Lower with FHA Refinance
Unlike with conventional refinancing for high loan-to-value mortgages, FHA home loans do not have pricing or mortgage rate add-ons for the cash-out aspect of a refinance transaction. With a conventional loan, funding a cash-out refinance for a mortgage balance up to 85% of your home’s value can add up to one-half of one percent (0.50%) to your mortgage rate, depending on your credit score. That would take a 4.75% interest rate to 5.25%. Private mortgage insurance–if even available–could add up to 0.60% or more, bringing this sample mortgage rate to 5.85%.
FHA home loans have no rate or fee add-ons for cash refinances. As well, FHA home loans have no adjustment for credit scores as low as 680–and in fact, with higher scores, you may see pricing improvements.
More Refinance Mortgages Classified as Cash-Out
Under current underwriting guidelines for conventional mortgages, the definition of a “cash-out refinance” has broadened. If your refinance mortgage amount is greater than the sum of your existing mortgage balance plus closing costs, you are applying for a cash-out refinance–with two basic exceptions. The first exemption is if the refinance mortgage is paying off not only the first mortgage but also a second mortgage used to purchase the property. The second exemption is if you are paying off a first and second mortgage and the second mortgage being paid off was used for home improvements to your home (you must prove the proceeds from the second mortgage were used for home improvement).
A mortgage to pay off a existing first mortgage plus a second mortgage older than one year old, or to pay off a first mortgage plus a home equity loan or home equity line of credit (HELOC) in which proceeds have not been obtained for more than twelve months, used to be considered a “rate-and-term” refinance. Because of the broader definition of a “cash-out” refinance–or the tighter definition of a “rate-and-term” refinance–more refinances are being categorized as a cash-out refinance, with according increases in mortgage rates and/or fees for conventional mortgages.
FHA Home Loan Refinance Benefits
To recap, here are the potential benefits of an FHA refinance over a conventional mortgage:
Get mortgage quotes on conventional and FHA home loan debt or mortgage consolidation or plug figures into a refinance calculator and see which type of mortgage benefits you.
Dennis C. Smith is co-owner and broker of record for Stratis Financial in southern California. He has over twenty years' experience in the mortgage industry.
