Refinancing an FHA Loan: Your Options and When It Makes Sense

Can you refinance an FHA loan?

Yes. Refinancing pays off your current loan with a new one, and there’s no rule against refinancing an FHA loan. Some options do require that you’ve had your current loan for a while, and every option has costs, so the real question is whether a refinance leaves you better off.

Option 1: FHA Streamline Refinance

The FHA Streamline replaces your FHA loan with a new FHA loan with less paperwork than a standard refinance. In most cases:

• No appraisal is required.
• Income and credit checks may be skipped, depending on the type of streamline.
• No cash out. It’s for lowering your rate or improving your terms, not for taking equity out.

To qualify, you’ll generally need:

• Time in the loan. At least six payments made, and at least 210 days since your current loan closed.
• A good recent payment history. HUD limits late payments in the months before you apply.
• A real benefit. HUD requires a “net tangible benefit,” meaning the new loan has to lower your rate or improve your terms by an amount HUD sets.

The details are in HUD’s Single Family Housing Policy Handbook, and a loan officer can check whether your loan qualifies.

The trade-off: a streamline keeps you in an FHA loan, so FHA mortgage insurance stays too. If dropping mortgage insurance is your goal, look at option 3.

Option 2: FHA cash-out or rate-and-term refinance

A standard FHA refinance works like a new FHA loan, with an appraisal and full documentation. It can be used to take cash out of your equity, up to FHA’s limits, or to change your rate or term when you don’t qualify for a streamline.

Option 3: Refinance to a conventional loan

If your credit has improved and your home has gained value, refinancing to a conventional loan can remove FHA mortgage insurance for good.

• With 20% equity or more, a conventional loan has no mortgage insurance at all.
• With less than 20% equity, you’d pay private mortgage insurance (PMI), but PMI can be cancelled once your balance reaches 80% of the home’s original value, and ends automatically at 78%.

A conventional refinance requires a full application, an appraisal and closing costs, so do the math before you start.

When refinancing makes sense

A refinance is worth it when the savings outweigh the cost. Closing costs are typically a few percent of the loan amount, and you can pay them upfront or, in many cases, add them to the new loan.

1. Find your break-even point. Divide your closing costs by your monthly savings. That’s how many months it takes to come out ahead.
2. Compare it with how long you’ll stay. If you’ll move before the break-even point, refinancing probably doesn’t pay.
3. Count mortgage insurance. Moving from FHA to conventional can save more than the rate change alone suggests, or less if you’d pay PMI for years.
4. Think about your term. Restarting a 30-year loan can lower your payment but add to the total interest you pay.
5. Watch for changes in income. A new job or a switch to commission or self-employed pay can make a full-documentation refinance harder for a while.

Not sure which option fits? A loan officer can compare a streamline, an FHA refinance and a conventional refinance for your loan, including the break-even point for each.

This article is general information, not an offer to lend or a commitment to lend. All loans are subject to credit approval, underwriting and property valuation. Belem Servicing LLC, NMLS ID #715386 (NMLS Consumer Access).

Sources

• U.S. Department of Housing and Urban Development, Single Family Housing Policy Handbook 4000.1
• FDIC Affordable Mortgage Lending Guide, FHA Streamline Refinance
• Consumer Financial Protection Bureau, What is private mortgage insurance?