Like many homeowners, your first mortgage may have been a loan with the Federal Housing Administration (FHA). These loans are backed by the FHA and are attractive to first-time homebuyers. Why? It’s because FHA loans make it easier to obtain financing, requiring only minimal down payments and fair-to-good credit scores. However with that, comes real cost that you already know about.
FHA loans require certain provisions which sometimes place a heavy burden on a homeowner’s budget, often in the form of premiums paid for mortgage insurance. In such cases, you may want to consider refinancing your FHA loan into a conventional mortgage. That could very well be you. It may be time to act and refinance out of costs that do not pay your mortgage balance down. We are also currently in an environment where rates are low and equity (home values) are rising.
So, Should You Refinance Your FHA to a Conventional Loan?
Here are the basics: You can refinance an FHA loan to a conventional loan, but it requires meeting minimum requirements. It’s especially beneficial to refinance your FHA if you have 20% equity in your home and so you can remove the lifetime private mortgage insurance (PMI). If you don’t meet the equity minimum for a conventional loan, you’ll also need to account for continued private mortgage insurance (PMI) costs until you’ve reached 78% in the loan-to-value ratio.
In relation to your mortgage, there still is a concept of good debt vs. bad debt. PMI private mortgage insurance, although is a necessary evil, can easily be remedied during these times. Don’t assume the value of your home. This is a mistake that many homeowners make, usually undervaluing. Homeowners — especially first-time homeowners — believe that value comes from making changes. The truth is that it comes from the market.
One last item is your credit. The FHA mortgage afforded you some bruises that they looked over along the way. Now that you have a 1, 2, or maybe even a 3-year history of successful payments on your mortgage — this can drastically change your credit score!
Smart money homeowners in FHA mortgages are taking the time right now to evaluate their current financial situation. The market is ripe with opportunity in rate and term. You may just be able to seize those advantages now!