Considerations When You Want to Refinance

October 14, 2021

Refinancing a mortgage has good points and bad points. Make the most informed decision about your refinance options as you can considering both. No loan is 100% in favor of the borrower but you can negotiate a better rate, monthly payment, or take cash out on the transaction if you choose your loan carefully and do so with an eye on your financial goals.

There are some basic types of FHA refinance loans you can choose from:
 

• FHA cash-out refinancing
• FHA no-cash-out refinancing
• FHA 203(k) Rehabilitation refinance loan
• FHA Streamline Refinance, also known as FHA Interest Rate Reduction Refinance Loan

The strong points and weak points of Streamline Refinances include the requirement that the borrower gets a tangible benefit from the loan in most cases--that’s a definite plus. A minus? At least for the borrower who needs cash back on the deal, FHA Streamline Refinance loans don’t permit cash to the borrower at closing the way an FHA cash-out refi does.

In the negatives, we find with Streamline refinance loans the biggest drawback may depend on the term of your old loan versus the new one. The math is simple--If you had a 30-year loan and you refinance into another 30-year loan, you’re paying longer than you would have if you had just stayed with the original mortgage.

Those who need lower payments may decide that making those payments for a while longer isn’t as important as making the payments work in a monthly budget.

Cash-out refinance loans have good and bad aspects, too. For cash out refinancing the perk for this type of loan is in the name--you get cash out on the transaction.

But borrowers who apply for this loan without having owned the home long and do not have a lot of equity it might not make sense to consider cash out refinancing until later on.

But if you have equity and want to take it out in cash, FHA cash out refinancing allows you to utilize those loan funds for any purpose acceptable to your lender including home repair or renovation.

You could apply for an FHA 203(k) Rehabilitation Refinance which allows loan funds for repair or remodeling. However, the nature of the work permitted with  203(k) loan funds may be restricted to a set of approved uses from the FHA loan rulebook.

That does not apply with an FHA cash-out loan, which means you could add luxury additions to your home not permitted with an FHA 203(k) Rehab loan such as barbecue pits or swimming pools.

You can do many things with an FHA refinance loan, but it’s best to do some planning first--decide what you want to use the loan to do. Not all refi loans are right for your purposes and a participating lender can help you find the right option based on your needs.

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