That’s a great question and at first glance the response might very well be to ignore refinancing altogether. First time home buyers who used an FHA loan to finance a home purchase might have worked with an inexperienced lender who didn’t work with FHA loans very often. That could very well have led to a less than pleasant home buying experience when it didn’t have to be so. The thoughts of applying for a mortgage all over again bring back headaches and apprehension. There are the pay check stubs and the income tax forms and the bank statements and answering all the questions the lender asks—it’s no wonder some decide to keep their current mortgage even though it might not be in their best interest. Which brings us to the point—is refinancing an FHA loan really worth it or not?
First, the FHA loan program offers a streamline refinance option not available with conventional mortgages. A streamline refinance asks for very little documentation from the borrowers. There are no pay checks to provide. No W2 forms or income tax forms needed. In fact, employment isn’t even verified. There are no credit checks and no minimum credit score is required. The FHA streamline is perhaps one of the easiest loan programs to qualify for.
Second, how do you know if refinancing is worth it just because rates might be lower? Again, another great question. When rates fall, it’s not an automatic that an FHA streamline is in your future. Rates don’t have to fall to a particular level in order for an FHA streamline to make sense. But you can tell if a refinance is in your best interest easily if you compare the monthly savings with the closing costs involved.
A refinance just like any other mortgage will have closing costs and borrowers will likely roll those closing costs into the loan. The trick though isn’t necessarily the rate but the savings. Let’s say the closing costs on an FHA loan are $3,000 for such things as title insurance, escrow and other charges. Now say the new monthly payment is $95 lower compared to the current mortgage. Divide the $75 into $3,000 and the answer is 31. It will take 31 months in order for the savings to overcome the closing costs. As long as the borrowers own the property for at least 31 months a refinance might make sense. That’s the most common way to determine if refinancing an FHA loan is worth it but you should really speak with a loan officer to discuss all your options. If it does make sense, it will be a much easier process this time around.