Mortgages are at historically low rates. If you’ve been living in your home for ten years or more, you might want to consider refinancing. The general refinancing rule of thumb is that it’s a good idea if you can reduce your interest rate by 2%. Many lenders will tell you however, that a 1% savings is good enough to consider refinancing.

Reducing FHA rates does more than save you money. It increases the rate with which you build equity in your home at the same time it decreases your monthly mortgage payment. Example: A 30 year fixed rate mortgage on a $100,000 house with 5.5% interest has an interest and principal of $568. The same loan with an interest rate of 4.1% has a monthly payment of $483.

It’s easy to calculate whether or not it makes sense to refinance using one of the many available online refinance calculators.

FHA Simple Refinance

A simple refinance is pretty straightforward. You end your current mortgage and enter into a new one with a lower interest rate. It doesn’t matter whether the rate is fixed or adjustable but there is not a cash out option. There are credit, income, and asset requirements to qualify for a simple refinance.

This refinance option requires an appraisal to determine your home’s increase in value. You are allowed to include your closing costs and pre-paids into the new loan as long as the amount of the mortgage does not exceed the appraisal value - 97.75% loan to value.

Benefits of a Refinance:

It lowers your monthly payments. This gives you more disposable income every month.
You can switch from an adjustable rate mortgage to a fixed rate mortgage. When you do this, you know what your mortgage payments are going to be throughout the term of the loan. With a fixed interest, you don’t have to worry about your payments going up.
You can shorten the term on your mortgage and pay your house off earlier than you had imagined.

FHA Streamline Refinance

A streamline is a quicker and easier way to refinance. You may not need an appraisal, and there’s less paperwork for the lender, saving you money and time.

Qualifications for a streamline refinance include:

You must have an existing FHA insured mortgage.
Your mortgage must be current.
You cannot have made more than one late payment in a year.
Your most recent six months payments must have been made on time.
You must make payments on your original mortgage for a minimum of 210 days before you apply to refinance.
You must be getting a tangible benefit of at least 0.5 percentage points reduction in the combine Mortgage Insurance Premium (MIP) and FHA rates or a refinance from an adjustable rate mortgage (ARM) to a fixed rate mortgage (but no more than 2 percentage points more than the combined MIP and interest rate).
The new mortgage cannot exceed your original mortgage.
You cannot get more than $500 cash in the refinance.

Simple Refinance vs. Streamline Refinance
If your house hasn’t increased much in value or you plan to sell in the near future, you’re probably better off going with a streamline refinance. With a simple refinance, you keep your costs low and can get a lot lower interest rate depending on the equity you have in your home.

FHA Cash Out Refinance

For homeowners who need cash and have equity in their homes, a cash out refinance can be a good option. You will need a current appraisal and a minimum of 20% equity based on that appraisal.

Requirements:

Credit Score:500 is the official FHA minimum credit score, but realistically you will need a score in the 600 to 660+ range before your lender will approve a refinance. If your score is in the high 500s, you may still be able to do a cash out refinance. FHA will approve it, but you’ll have to find a lender willing to take the risk.

Debt to Income Ratio:Generally speaking, the maximum debt to income ratio allowable is 43% unless there are mitigating factors like an unusually high credit score or an abundance of equity. Under certain circumstances, lenders will accept up to 50%.

Loan Limits:In 2020 the maximum FHA loan limit ranges from $331,760 for low cost counties to $765,600 in high cost counties.

95% and 85% cash outs are a thing of the past. On September 1, 2019, it was lowered to 80%. Since a cash out refinance is considered a debt, it is not taxable, but you should still consult your accountant before you file. There is no seasoning requirement with a cash out. Non-occupant co-borrowers are not allowed. Second mortgages can’t be added to cash outs unless the total of the two loans add up to 80% or less of the value of the home.

FHA Rehab Mortgages

If you decide to buy a fixer-upper, you may be able to get a 203(k) loan that includes the primary loan or refinance along with the funds to rehab it. The money can only be used for certain things however.

Reconstruction and alternation of the structure
Improvements and modifications to the home’s design
Elimination of hazards related to health and safety
Improvements to appearance and elimination of obsolescence
Replacing or reconditioning of plumbing
Well and/or septic system installation
Addition of floors and/or flooring treatments
Accessibility enhancements for the disabled
Energy conservation improvements

To qualify for a 203(k) loan, you’ll need a minimum credit score of 580, but expect the lender to be looking for something more in the range of 620-640. Your debt to income ratio can’t be more than 41% to 45%. You have to have 3.4% or more equity in the home to qualify. The loan amount (including renovation and purchase) must be less than the maximum loan amount where you live. The home you are renovating must be your primary residence.

Basic Rules for FHA Loans

You must be an owner occupant. This means you are using the home are your primary residence. It cannot be a rental property or any other type of real estate investment.
You don’t necessarily have to be a U.S. citizen to get a loan. You cannot be an illegal alien, but you can be a legal permanent or non-permanent resident.

Disadvantages of Refinancing

Closing costs and refinancing fees are expensive, It can cost as much or more than your original mortgage.
Going from a fixed rate mortgage to an adjustable rate mortgage can increase FHA rates.
If you do a cash out refinance, you’ll lower the equity in your home which may cause you to have to pay private mortgage insurance.