Refinancing can seem like a hassle because it involves a lot of paperwork, documentation, and answering questions; however, it can potentially save you thousands of dollars over the long term.
If you currently have an FHA mortgage and are considering a refinance, here are some pros and cons to help you determine whether or not it’s a good idea, given your current situation and goals.
Pros of Refinancing to a Conventional Mortgage
The biggest benefit of refinancing your FHA mortgage to a conventional mortgage is that you will likely eliminate your monthly mortgage insurance premium (MIP).
This amount could range from $150 to $450 per month, and if you were able to save that over the course of the year you could potentially make an additional mortgage payment!
Cons of Refinancing to a Conventional Mortgage
The biggest drawback of refinancing to a conventional mortgage is the money needed for closing costs.
This amount can range from 2% to 5% of the loan’s value. Depending on the value of the loan that you are seeking, this can end up being several thousand dollars.
It’s important to do the math and figure out if the mortgage insurance you will pay over the next several years is more or less than the amount that you will have to come up with to refinance into a traditional loan.
More importantly, you’ll need to decide if you even have that amount of money available to pay the closing costs.
It’s also important to realize that if you haven’t yet built up enough equity in the home (roughly 80% of the home’s value), you will probably need to pay Private Mortgage Insurance (PMI).
This may end up being as much as the FHA mortgage insurance you are currently paying!
What You’ll Need to Refinance
The process of refinancing your FHA mortgage into a conventional mortgage is very much like the process you went through to get the FHA loan in the first place. You’ll need to provide lots of documents relevant to your credit, employment, and finances. These documents may include:
- Pay stubs
- Tax returns and W-2′s and/or 1099′s
- A credit report
- Asset statements
Some other hidden costs include possibly paying for an appraisal of your home and legal fees.
FHA Streamline Refinance
If you aren’t sure you meet the criteria for a conventional loan or don’t have the upfront money available for closing costs, but still want to try to save some money on your monthly mortgage payment, there may be another option.
An FHA Streamline Refinance loan allows current FHA borrowers to refinance without the hassle of in-depth documentation, credit, or income verification. This makes the process much simpler and quicker.
Like all loan programs, there are some minimum requirements that must be met:
- You must already have an FHA-backed mortgage.
- You must be up to date on your mortgage payments
- You must wait a minimum of 210 days, or have six months of on-time payments before applying.
With the FHA Streamline program, you will still have the mortgage insurance requirement. However, this cost is usually included in your mortgage and not required as an upfront payment.