Refinance Loan Choices You Should Consider

November 25, 2020

FHA home loans are not limited to “forward mortgages” or purchase loans for a home. FHA mortgage loan options also include refinancing and with mortgage rates dropping to historic lows in 2020 many more homeowners are weighing their refinance loan options. You’ll find that when researching your refinance loan there are good reasons to refinance and not-so-good reasons.

The most important thing to do as you consider how to approach a refi loan is determine what your goals for the new loan might be. Cash out at closing time is a motivator for some, a lower interest rate or mortgage payment is another. And still others are interested in fixing up their home with refinance loan funds.

All these options are possible but not all these options are the same kind of loan. That is one reason why you should talk with your participating FHA lender about the specific reason you want to apply for refinancing--she may be able to explain why certain refinance loans have advantages over others based on what you need to do with the money.

Do you want a lower interest rate? Your options here include refinancing into a shorter loan term but you can also consider the same loan term you have now under something called the FHA Streamline Refinance which generally must result in a lower rate, a lower payment, or getting out of an adjustable-rate mortgage. 

Streamline refinances are for existing FHA mortgages only and do NOT feature cash back to the borrower at closing time the way cash-out refinance loans do, but they are an excellent tool for those who need the benefits of a lower payment, mortgage rate, etc.

Do you need to refinance a non-FHA mortgage? Your options include using an FHA simple refinance, an FHA rate-and-term refinance, and with both of these you can choose to refinance into a 15-year loan term which may also provide a form of a lower rate. 

Borrowers need to understand that in general the interest rate offered to you depends on several factors including your FICO scores and credit history. If you are worried about your FICO scores, ask a loan officer what you need to do if they need some improvement in order to get a lower rate.

FHA cash-out refinances are available for both FHA and non-FHA mortgages. Getting cash back on the deal at closing time can be a big incentive to look into cash-out loans but your goals for the money should be front-and-center when weighing your options. 

Why? Paying off revolving credit using a cash-out refinance carries a specific kind of risk--and that risk is basically that over time you have the ability to run those revolving account balances right back up to where they were before you took out the cash-out loan. That’s a factor to beware of.

The same goes for those who want to apply for a refinance loan to pay for home improvements. Yes, you could apply for an FHA cash-out refinance, but there is an FHA 203(k) Rehabilitation Refinance mortgage which could provide more borrowing power for those home improvement projects. Talk to your loan officer about your goals for the loan and see what suggestions she might offer you knowing what you need to do with the funds.

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