When to Refinance an
FHA Loan

When to Refinance an FHA Loan

When it comes to managing your finances, knowing when to do refinance your FHA mortgage can make a significant difference in your long-term financial health. Refinancing can help you lower your monthly payments, reduce your interest rate, or even shorten the term of your loan. However, it’s not always the right choice, and understanding the factors involved is crucial.


Understanding FHA Loan Refinancing

Refinancing an FHA Loan involves replacing your original FHA Loan with a new one. This new loan can have different terms, such as a lower interest rate, a shorter loan term, or a change from an adjustable-rate mortgage to a fixed-rate mortgage. Refinancing can also allow you to access the equity in your home to do a cash-out refinance, which can be used for home improvements, debt consolidation, or other financial needs.

When you refinance, you’ll go through a similar process as when you first obtained your FHA Loan. You’ll need to qualify based on factors such as your credit score, income, and the value of your home. Closing costs will also apply, so it’s essential to consider these costs against the potential savings or benefits of refinancing. Refinancing an FHA Loan can be a strategic financial move that helps you save money, reduce your monthly payments, or achieve other financial goals. However, it’s important to carefully weigh the costs and benefits and consider your long-term financial plans before making a decision. Our licensed Loan Officers can help you assess if it’s a good time to refinance your home loan.


The Optimal Times to Refinance an FHA Loan

Refinancing a loan is subject to ebbs and flows for favorable times, just like securing a mortgage. There are some instances when it makes sense to jump on a refinance and other times where waiting is the better move.

Interest Rate Decrease
Waiting for interest rates to decrease can be a smart strategy if you’re considering a mortgage refinance for an FHA Loan, as it can potentially save you money over the life of your loan. The impact of a rate decrease on your savings depends on various factors, such as the current interest rate on your loan, the remaining balance, and how long you plan to stay in your home. For some homeowners, even a modest reduction in interest rates, such as 0.5%, can lead to significant savings. However, others may need to see a more substantial decrease, perhaps around 1% or more, to make refinancing worthwhile. It’s important to evaluate your individual circumstances and do the math to determine if refinancing makes financial sense for you.

Change Mortgage Terms or Program
If you’re looking to switch your mortgage terms or move into a different program (like an FHA to Conventional Refinance), a mortgage refinance of your FHA Loan might be in the cards. Refinancing can allow you to reduce or increase the payoff time, such as switching from a 30-year to a 15-year mortgage. Shortening the loan term can help you build equity faster and save significantly on interest payments over the life of the loan, albeit with higher monthly payments. On the other hand, extending the loan term can lower your monthly payments, providing more financial flexibility in the short term. Understanding your monthly budget is the key here.

Changing from an FHA Loan to a Conventional Loan can remove mortgage insurance from your loan if you have enough equity in your home.

Tap Into Home Equity
Home equity is essentially a gateway to achieving other financial goals. Dipping into home equity can allow you to pay off other debts, such as high-interest credit card balances or personal loans, by consolidating them into your mortgage. This can lower your overall interest rate and monthly payments, making it easier to manage your debt. Another use of home equity is to pay for a child’s college tuition, providing a source of funding that may have lower interest rates than student loans. You might also consider using your home equity to purchase a dream car, make a down payment on a vacation home, or invest in another property.


Considerations Before Refinancing an FHA Loan

Before moving forward with a mortgage refinance of your FHA Loan, it’s important to consider several factors to ensure it’s the right decision for you from a financial standpoint. First things first, you should be aware that refinancing typically incurs closing costs, which can add to the overall cost of the new loan. Calculate these expenses against the potential savings from refinancing to determine if it’s financially beneficial in the long run.

Understanding your breakeven point is paramount. This point represents the time it takes for the savings from the new loan to offset the cost of refinancing. A Loan Officer can help you calculate this figure, which can vary depending on factors like the new interest rate, loan amount, and closing costs.


When NOT to Refinance Your Home Loan

Moving forward with a refinance, whether you’re doing an FHA to Conventional Refinance or a cash-out refinance, there are basically block-out times you need to be aware of. In other words, you can’t just pull the refinance trigger whenever you see fit. The decision should be both well-timed and well-thought out.

Don’t Refinance Because Your Loan Servicer “Told You To”
Refinancing a mortgage should always be a decision made based on your individual financial goals and needs, not just because your Loan Servicer suggests it . While Loan Servicers may offer refinancing as an option, their primary goal is often to generate more business rather than to benefit your personal financial situation. It’s essential to thoroughly evaluate the terms of any refinancing offer and compare them with your current loan to ensure that you are obtaining your refinance goals. Consider factors such as interest rates, closing costs, and how long you plan to stay in your home.

When Your Breakeven Point is Too Far Away
If your breakeven point is too far away, refinancing may not make sense. For example, if you plan to sell your home in the near future, you may not recoup the costs of refinancing through lower monthly payments. Similarly, if you’re several years into your current mortgage and refinance into a new 30-year loan, you could end up paying more in interest over the life of the loan, even if your monthly payments decrease. It’s crucial to carefully evaluate the potential savings and costs of refinancing to ensure it aligns with your long-term financial goals.

When You Don’t Have Enough Equity
Lenders typically require a certain amount of equity to qualify for a refinance, ranging from 5% to 20%, depending on the type of loan. Without enough equity, you may not qualify for a refinance or may be required to pay private mortgage insurance (PMI), which can increase your monthly payments. Additionally, if you refinance with minimal equity and home prices decline, you could end up owing more than your home is worth, which is known as being “underwater” on your mortgage and in this particular situation, you’d be underwater with no snorkel in sight.

Start Your FHA Refinance

If you’ve carefully weighed out your financial status with your financial goals and you feel like now is the right time to pursue a mortgage refinance, our Loan Officers at Treadstone can help you through the process to help you secure a mortgage that’s favorable for you!

T he right time to refinance an FHA Loan can be tricky — let us help!