According to Freddie Mac, the 30-year fixed-rate mortgage fell to the lowest rate ever recorded during the week of January 6, 2021, to 2.65%. Rates are still close to their lowest levels in history.

The agency has been tracking rates for nearly 50 years.

But what about those who owe more than their home is worth and can’t refinance? What can they do? Up until 2018, there was HARP.

Now there are new refinance programs available to help homeowners with very little equity refinance at today’s low rates.

TIP: With home values increasing nationwide, many homeowners who previously had too little equity to refinance now qualify! Check your refinance eligibility. Start here.

Standard loans require you to have 10-20% equity before a refinance is possible. If a homeowner is “upside-down” with a mortgage, the borrowers would either have to pay down the mortgage to an acceptable level or give up trying altogether.

But current refinance programs may be available to homeowners with little or even no home equity.

Mortgage stimulus program and other good news for homeowners

For many, there’s never been a better time to be a homeowner. Home prices are rising very quickly and, even if you’re struggling to keep up with payments, various mortgage refinance programs are standing by to help you out.

Mortgage rates are near all-time lows and homeowners could stand to save significantly on their monthly payments. But what if you’re blocked from refinancing because your mortgage balance is close to your home’s market value — or is even higher? Well, there may be good news for you, too.

Fortunately, home values have been rapidly rising across the country. Fewer and fewer homeowners are underwater.

As a result, many homeowners may be eligible to refinance, even without a special program like HIRO or FMERR. It’s worth checking your refinance eligibility to determine whether you could benefit from low-interest rates and a reduced monthly payment.

Mortgage Refinance Relief in 2024

The HARP program (Home Affordable Refinance Program) was live between April 2009 and the end of 2018. It helped more than 3.5 million borrowers successfully refinance their Fannie or Freddie mortgages.

In recent years, the Fannie Mae High LTV Refinance Option (HIRO) and the Freddie Mac Enhanced Relief Refinance (FMERR) program were introduced to offer similar refinance relief to HARP.

Take advantage of historically low interest rates with refinance relief programs

These new programs are important because mortgage rates have plunged in the last 18 months. The 30-year-fixed mortgage rate hit its lowest level ever in early January 2021, bottoming out at 2.65%.

Even as of October 2021, 30-year fixed-rate mortgage rates hovered just below or slightly above 3%.

Copyright 2024 Freddie Mac. Averages are based on conforming mortgages with 20% down.

Homeowners with home values that were too low relative to their mortgage balances were barred from taking advantage of these historically low interest rates — and from the substantial monthly savings that came with them.

That’s where HIRO and FMERR come in. Both programs allowed homeowners to refinance their Fannie or Freddie mortgages, even if their homes were “underwater,” or higher than their homes’ market value. Though these relief programs are currently paused, many homeowners are finding they can still refinance to a lower payment thanks to rising equity and low interest rates.

HIRO: The middle-class mortgage stimulus package

Editor’s note: Fannie Mae has temporarily paused the HIRO program due to a low number of applicants. With home equity increasing nationwide, many owners are eligible to refinance without needing a special program like HIRO. Contact a lender to check your equity levels and find out whether you qualify for a refinance.

Some even call the HIRO program a middle-class stimulus program. Why? First, it replaces HARP, a loan program that was first enacted by Congress in 2009 to help millions of homeowners to refinance their mortgage and get a lower rate without needing any equity at all.

Second, the HIRO loan helps underwater homeowners reduce rates and payments, just as rates are falling to fresh lows.

A refinance can put serious money back into the pockets of middle-class Americans, which stimulates the economy — not to mention the everyday household.

HIRO comes with other advantages. You can often qualify for an appraisal waiver, saving hundreds of dollars. But even if you need an appraisal, value doesn’t matter. You can owe $200,000 on a home currently valued at $175,000 and still lower your rate with a refinance.

That leaves potentially thousands of homeowners who might have applied for the 2009 HARP but didn’t get the chance before the federal government program expired.

HIRO Eligibility: Qualify for mortgage relief and a lower interest rate

The HIRO qualifications are relatively simple, but they are important. You may be eligible for HIRO if:

• Your current mortgage loan is owned by Fannie Mae*
• Your loan must have been originated after October 1, 2017
• At least 15 months have passed from the note date of the existing loan to the note date of the new home loan
• You have made all your payments on time in the last 6 months
• Your mortgage balance is 97.1% or higher as a percentage of your home’s market value, for a one-unit, owner-occupied dwelling

*You may not even know that your mortgage is owned by Fannie Mae. If you’re unsure, use this lookup tool on the Fannie Mae website.

If you meet these conditions you are very likely to have access to lower rates but you need to act now before rates go up. Speak with your mortgage lender about relief options.

FMERR: The Enhanced Relief Refinance Program

Editor’s note: Freddie Mac has temporarily paused the FMERR program due to a low number of applicants. With home equity increasing nationwide, many owners are eligible to refinance without needing a special program like FMERR. Contact a lender to check your equity levels and find out whether you qualify for a refinance.

For borrowers with a mortgage through Freddie Mac, Freddie Mac’s Enhanced Relief Refinance program (FMERR) was created to help homeowners with limited equity take advantage of historically low interest rates and reduce their monthly payments.

FMERR Eligibility: Qualify for mortgage relief and a lower interest rate

You may be eligible for FMERR if:

• Your current mortgage is owned by Freddie Mac*
• Your loan was originated on or after November 1, 2018
• Your LTV is at least 97.01% for a one-unit, owner-occupied resident
• You have made all your payments on time in the last 6 months
• Your mortgage balance is 97.1% or higher as a percentage of your home’s market value, for a one-unit, owner-occupied dwelling

*You may not even know that your mortgage is owned by Freddie Mac. If you’re unsure, use this lookup tool on the Freddie Mac website.

If you meet these conditions you are very likely to have access to lower rates but you need to act now before rates go up. Speak with your mortgage lender about relief options.

Is there congress mortgage stimulus or COVID-19 mortgage relief?

Although there’s no current mortgage stimulus from Congress, there is federal help available for homeowners.

When President Joe Biden signed the American Rescue Plan into law in March 2021, it famously included stimulus checks to nearly all households. It also provided special financial assistance for homeowners who were — or are — struggling financially as a result of the COVID-19 pandemic.

The Homeowner Assistance Fund (HAF) is intended to help with your monthly mortgage payments — and with property taxes, homeowners insurance, homeowners association (HOA) fees and utility bills.

Although these are federal funds, they’ve been sent out to states to administer. For help, you apply to your state’s housing finance agency. Locate your state’s agency and contact information with this lookup tool.

There are some eligibility requirements for these funds. To qualify, your mortgage balance must be $548,250 or less, and most of the funds are designated for borrowers with average or below-average incomes.

Negotiating mortgage forbearance

Most mortgage servicers are willing to work with borrowers who may be falling behind on their mortgage loans. If you’re unsure who your loan servicer is, this lookup tool can help you find that information.

However, if your mortgage is owned by Fannie or Freddie or is a government-backed loan (an FHA, VA or USDA loan), you have more defined rights. You could be allowed to pause or reduce your mortgage payments for an agreed-upon forbearance period (up to 18 months in extreme cases).

Of course, you’ll still owe the money you’ve delayed paying and will have to repay it at some point in the future. Still, with these particular loans, you shouldn’t face any additional fees, interest or penalties.

For more information, visit the Consumer Financial Protection Bureau information page.

FHA, VA and USDA loans: Take advantage of low interest rates for govvernment-backed loans

If you have a government-backed loan — an FHA, VA or USDA loan — you won’t be able to take advantage of the HIRO or FMERR programs.

Still, there’s another great refinance option available, to enable homeowners to reduce their mortgage interest rate — even if their home’s market value is low compared to their mortgage balance.

If your mortgage is backed by the Federal Housing Administration, the Department of Veterans Affairs or the United States Department of Agriculture, you have refinancing options, even if your mortgage is underwater.

FHA, VA and USDA loan programs all offer Streamline Refinance options, which are quick and affordable refinance loans with reduced eligibility requirements. These Streamline Refinance programs require little paperwork and take less time and money than a conventional refinance.

Streamline Refinance Eligibility: Lower your interest rate quickly and affordably

You may be eligible for a Streamline Refinance if:

• You have an FHA, VA or USDA loan
• You will benefit demonstrably from the refinance, such as by a lower mortgage rate or monthly payment
• No missed payments in the last 6 months

If you meet these conditions you are very likely to have access to lower rates but you need to act now before rates go up. Speak with your mortgage lender about your personal finances and relief options.

VA Streamline Refinance

Though not a formal mortgage relief program, VA borrowers can take advantage of the VA Streamline Refinance, also known as the Interest Rate Reduction Refinance Loan (IRRRL), which allows military service members and their families to quickly and affordably take advantage of low interest rates and reduce their monthly mortgage payment.

One notable benefit of the IRRRL is that borrowers can roll all closing costs into the new loan and pay them down over the life of the loan. That means it’s possible to refinance without spending any money up front.

For borrowers looking to reduce their interest rate without taking any cash out of their home equity, the VA Streamline Refinance is one of the best mortgage products on the market.

VA Streamline Refinance Eligibility: Lower your interest rate and monthly payments

To qualify for a VA Streamline Refinance, you must meet the VA’s minimum service requirements. Most veterans, including National Guard and Reservists and their families, can qualify.

You can typically qualify for a VA Streamline Refinance without any credit score, income or asset verification, or without a property appraisal. That means you can refinance quickly and affordably.

In addition to those minimum service requirements, you may be eligible if you meet the following criteria:

• You have made all your payments on time in the last 6 months
• It’s been 210 days or more since you closed on your existing loan
• You will benefit demonstrably from the new mortgage, such as by a lower mortgage rate or monthly payment

Mortgage Refinance Relief FAQ

Does Congress have a mortgage stimulus program?

Although there’s no current mortgage stimulus from Congress, there is federal help available for homeowners. In March 2021, the American Rescue Plan designated $10 billion to help struggling homeowners. The funds are distributed by individual states and you can locate your state’s agency and contact information with this lookup tool.

What is the Congress mortgage stimulus program?

Although there’s no current mortgage stimulus from Congress, there is federal help available for homeowners. It’s called the Homeowner Assistance Fund. This money is intended to help with a variety of homeownership costs, in addition to monthly mortgage payments, including property taxes, homeowners insurance, utility bills and HOA dues.

Is HARP still available?

No. HARP (the Home Affordable Refinance Program) was discontinued on the last day of 2018. HIRO and FMERR were launched in 2021 and serve a similar function.

Are mortgage relief programs real?

Yes, these mortgage relief programs are real and available to help homeowners experiencing financial hardship. Be sure to apply for mortgage assistance directly through your state’s housing finance agency.

Who is eligible for mortgage relief programs?

You may be eligible for one of several mortgage relief programs, depending on the type of mortgage you have, even if your home value is low compared to your mortgage balance.

The post Mortgage Relief | Mortgage Stimulus Program 2024 first appeared on My Mortgage Insider.

When you apply for a cash-out refinance, it means you want to take out some of that equity in a lump sum of cash. It also requires you to replace your current mortgage with a new one, but for more than you owe on your home. You receive the difference in cash to use as you please — pay off debt, home improvements, pay student loans. Although, as you’ll learn in this guide, some uses of the cash are better than others.

Pros of a cash-out refinance

You can reap a bounty of benefits if you meet these conditions:

• A lower interest rate. Refinancing your mortgage can lower your interest rate, especially if you purchased or refinanced your home a few years ago when rates were much higher. For example, if you bought your current home in 2018 your interest rate for a 30-year fixed loan could be as high as 5%. Today rates average between 3 to 4 percent. If you only want to lower your interest rate and don’t need the cash, you’ll do better with a regular refinance.
• A higher credit score. If you use the cash to pay off your outstanding debts, you’re on the road to increasing your credit score. That’s because you’ve decreased your credit utilization ratio or the percentage of your credit amount that you’re currently using.
• Debt consolidation and other uses for the cash. When you pay down your credit cards and other bills, you can then consolidate the remainder of the debt into one account with a lower interest rate. Other positive uses for the cash from a mortgage refinance include contributing to your retirement savings, starting or adding to a college fund, and making home renovations.
• A tax deduction. If you put the cash into home improvements, you may be able to write off the mortgage interest. Whatever modifications you make must substantially add to your home’s value in order to do this. These might include adding a stone veneer to the exterior, building a deck and patio, a major kitchen remodel, or updating a bathroom.

Cons of a cash-out refinance

There are a number of downsides to a cash-out refinance though, including:

• Requires an appraisal. Cash-out refinances require an appraisal by a certified, state-licensed home appraiser. This person determines your home’s value by visiting your property, comparing it to similar properties, and then writing a report using the data he’s gathered. An appraisal usually costs from $400-$600. Depending on the state of the real estate market, scheduling and completing an appraisal may take some time.
• Closing costs. You must pay the closing costs when you receive a cash-out refinance loan. Typically, these are between 2-5 percent of the entire new loan amount and include lender origination fees, attorney’s fees, and the appraisal fee, if you haven’t already paid that separately. Due to the high costs of a refinance, these loans are best when you’re taking out a large sum of money. For example, paying $5,000 in closing costs isn’t worth it if you’re only getting $10,000 in cash. You’re better off getting a home equity line, which comes with lower closing costs. But if you’re getting $100,000 cash from the transaction, it may be worth the extra fees.
• Private mortgage insurance. When you borrow more than 80 percent of your home’s equity or value, you’ll have to obtain private mortgage insurance (PMI). This insurance protects the lender in case you don’t make your payments. Currently, PMI costs from .05-1 percent of your loan amount. You usually have two options – a one-time upfront annual premium paid at closing or you can roll the PMI into your monthly loan payments. Generally, it’s not worth adding PMI to your loan just to get cash out of the home. Consider a home equity line or loan, which does not require PMI.
• Foreclosure risk. If, at some time in the future, you’re unable to make your mortgage payments, you risk losing your home due to foreclosure. Your home becomes the collateral for any kind of mortgage you have.
• Different loan terms. Your loan terms may change when you get a cash-out refinance. You’re paying off your original home loan and swapping it for a new one and that means new terms. Following are a few changes that could happen: The new mortgage may take longer to repay our monthly payments may go up or down Your interest rate could change. Be sure to read the Closing Disclosure to note your new loan terms. This is what to look for in the document.
• You don’t get your cash instantly. The processes involved with approving a mortgage loan or a refinance — an appraisal, the underwriting — may take 30-60 days, depending on how busy mortgage lenders are when you apply. On top of that, there is a 3-day “rescission period” toward the end of the loan where, by law, you can cancel the loan if you feel it isn’t the right move. All in all, a cash-out refinance is not a good solution if you need quick cash.

Best and worst uses of a cash-out refinance

Although the cash you receive from a cash-out refinance can buy whatever you please, you might want to consider the consequences of some of these purchases. Let’s start with some of the best ways to use your cash.

• Home improvement projects. According to HomeAdvisor the average cost to remodel a bathroom runs around $10,000, while the national average for a complete kitchen remodel is $25,100. For expensive improvements like these, a cash-out refinance can be the way to go. You’ll also increase the value of your home with certain improvements like those listed and energy-efficient appliances, adding more square footage like a new home office and replacing windows.
• Paying off credit card debt. This can be a good idea, as some credit card interest rates run as high as 18 percent. However, you’ll need to employ some tactics to keep from running up new balances on those credit cards. Stick to a budget that balances your expenses and your income. When you do make a credit card purchase, which you’ll want to do to rebuild your credit score, either have the cash on hand to back up that spending or pay it off right away. And, build up an emergency fund with what you would have been paying in credit card interest. That way you’re less likely to get into trouble with credit cards again.
• Add to your existing investments. This may be wise if those investments are gaining at a higher rate than your refinance rate. It’s best to check with a trusted financial planner before using this option.
• Purchase a rental property. This can be a positive use of the cash as long as you don’t mind all the work you’ll need to do. Investigate the legal and financial ramifications before going down this path.
• Buy a vacation home. If you don’t want to be a landlord, you could use the cash from your cash-out refinance as the down payment on your very own vacation spot.
• Put it to use for an existing business of yours or your new startup. Having emergency cash for a business can come in handy.

How to get a cash-out refinance

Now that you’ve decided a cash-out refinance meets your needs, what steps should you follow?

Check your credit score at one of the free sites like annualcreditreport.com or your credit union. Most lenders require a credit score of 620 or higher for a cash-out refinance. If your score falls below that, you’ll need to work on raising it before applying for a cash-out refinance. You’ll also need to check your debt-to-income ratio, which needs to be less than 40-45 percent. This is the amount of your monthly debts divided by your total monthly income.

You must have also accrued substantial equity in your home to take out a cash-out refinance. Removing 100 percent of your equity isn’t allowed unless you qualify for a VA cash-out refinance (requires military service history) and that lender allows a loan of 100 percent.

It’s a good idea to know how much cash you’ll need ahead of time. If you’re going to use the money for household improvements, first get some estimates from contractors so you’ll have a good idea of what those upgrades will cost. To pay off high-interest debt, like credit cards, tally that total before asking for cash-out refinance.

That way you only take out the amount of equity you really need and can leave some.

What are the alternatives to a cash-out refinance?

There are many scenarios in which a cash-out refinance is not the best loan option: You want to keep closing costs to a minimum You have less than 30-40% equity in the home You are seeking a relatively small amount of cash, say $5,000 – $20,000.

In these cases, you should at least consider a cash-out refinance alternative.

Home Equity Line of Credit: How is a HELOC different from a cash-out refinance?

A home equity line of credit (HELOC) differs considerably from a cash-out refinance. It’s still secured by your home, but it doesn’t replace your existing loan. It’s an additional, totally separate loan, which is why HELOCs are sometimes known as second mortgages.

You can think of a HELOC like an open-ended loan, somewhat like a credit card. You borrow against the HELOC as the need arises, and when you repay, you still have access to borrow again up to the available limit.

Most HELOCs come with an adjustable interest rate, which means the rate can change month to month. The lender allows interest-only repayments for a certain amount of time and usually the borrower can only access these funds for 10 years, which is called the draw period. When the draw period is over, you pay a regular monthly payment which will fully repay the mortgage balance, typically over an additional 10 years.

Home Equity Loan: How is a home equity Loan different from a cash-out refinance?

A home equity loan, also secured by your home, is for a fixed amount of money that you repay over a fixed amount of time. Like a home equity line, it’s an additional loan that sits on top of your current primary mortgage.

But unlike a home equity line, you don’t have access to borrow funds again and again. So these are better for one-time projects.

The amount you can borrow is usually 85 percent or less of the equity you have in your home. Your income, your credit history, and the market value of your home also factor in to determine how much you can borrow.

This is the main difference between a home equity loan and a cash-out refinance.

Home equity loan: Is a second mortgage on your home. The existing primary mortgage stays intact

Cash-out refinance: Converts your current mortgage into a separate larger one, with up to 30 years to pay it off. In the end, you just have one loan.

Would a cash-out loan, home equity loan, or a personal loan work best for your situation?

How long you’ve owned your home, and your current interest rate should factor into your decision about what type of loan will work the best for you. Consider the following scenarios and decide which one fits your circumstances:

Scenario 1: High Current Rate, Lots of Equity

Homeowner No. 1, a couple, has a high-interest rate (8% or higher) on their current mortgage and they’ve earned a sizable amount of equity (70-85%). This homeowner wants to lower their interest rate and at the same time pull out some cash. The home is old enough that some home improvements won’t wait much longer, plus they’d like to increase the value of their property in case they want to sell and downsize in the future. Homeowner No. 1 is a good candidate for a cash-out refinance.

Scenario 2: New Homeowner, Little Equity

Homeowner No. 2, a family, recently bought the home they’re living in, so they don’t have much equity yet. This family looks forward to sending their son to college in two years but doesn’t quite know how they’ll afford it without burying them all in student loan debt. Other homeowners in this category might need money for household repairs, or to pay their credit card bills. All these homeowners will be best suited to either a personal loan or a personal line of credit.

Scenario 3: Homeowner with Equity and a Low Rate

Homeowner No. 3, a single man, already has a very low mortgage rate and can’t see how he can get a better one. Still, he needs money to replace appliances, which all seem to be breaking at the same time. Refinancing isn’t a good option for him, since he’ll lose his current low rate and would have to accept a higher interest rate. So he’s going to check into adding a home equity loan or a home equity line of credit to his existing first mortgage. See below for more information on how home equity lines/loans work.

Get approved for a cash-out refi

During the approval process, the lender may ask you for additional documents like bank statements, pay stubs, or income tax returns. Having these financial papers readily available will help streamline your approval.

Address any questions you have to your lender. Soon you’ll have the cash you need.

The post Cash-out Refinance | Pros & Cons 2024 first appeared on My Mortgage Insider.

Home buyers pay an upfront mortgage insurance premium when they close on an FHA loan. This upfront fee — known as UFMIP or MIP — equals 1.75 percent of the loan amount.

This fee is refundable when you refinance into another FHA loan, like the FHA Streamline Refinance or the FHA Cash-out Refinance, within three years of closing your FHA home loan.

Your refundable amount will get smaller each month, and you will no longer be eligible for any refund amount after three years.

See if you’re eligible for an MIP refund and an FHA refinance loan today (Sep 16th, 2024)

FHA MIP Refund Chart 2024

Source: HUD 4155.2 7.2.i Elimination of UFMIP Refunds

Why does the FHA refund upfront mortgage insurance?

The word “refund” can be misleading. The Federal Housing Administration won’t send you a check in the mail. Instead, it’ll let you “re-use” part of the upfront MIP you’ve already paid.
You can reuse the FHA insurance premium only if you’re refinancing into another FHA loan — and only if you refinance within three years.

The FHA allows these partial refunds because MIP has a purpose. This fee helps lenders offer lower interest rates to borrowers who have riskier applications. It’s the main reason FHA loans can be a really good deal for home buyers with lower credit scores.

But the benefits of upfront MIP build slowly; your savings accrue gradually, with each monthly mortgage payment you make.

If you don’t keep your loan long enough to benefit very much from its lower interest rate, the FHA will refund part of the fee so you can re-use the money on your next FHA loan.

How to calculate your FHA MIP refund

To calculate your MIP amount for your new FHA refinance loan, you’ll need to know the following figures:

1. Your original MIP amount paid. You can find this listed on your original loan documents. Your loan officer can help you determine this.
2. The number of months since your loan’s closing date.
3. Your refund percentage (see chart above).

Multiply your original upfront MIP amount by the eligible refund percentage to determine your total refund amount.

For example, if your original MIP amount was $2,500 on a loan that closed 10 months ago, then your eligible refund percentage is 62%. Your MIP refund amount is $1,550 ($2,500 x 0.62).

This refund amount will be applied to the upfront MIP due on your FHA refinance loan.

How to calculate your new FHA loan MIP amount

To calculate your MIP amount for your new FHA refinance loan, you’ll need to determine the following figures:

1. Your new loan’s upfront mortgage insurance premium (UFMIP) amount — this is calculated by multiplying your base loan amount by 0.0175 (all FHA mortgages charge 1.75 percent for UFMIP)
2. Your MIP refund amount (see above section for how to calculate)

Next, subtract your MIP refund amount from your new mortgage loan’s UFMIP amount. This amount is the total UFMIP you owe on your new refinance loan.

For example, if your new refinance loan is $200,000, then your new UFMIP amount is $3,500 ($200,000 x 0.0175). Now, let’s say your MIP refund amount is $1,800. 

That means, you’ll only have to pay $1,700 UFMIP towards your new refinance loan ($3,500 – $1,800 = $1,700).

Eligibility requirements for FHA MIP refunds

The FHA has specific eligibility requirements for MIP refunds both for your original FHA loan and your new FHA refinance loan. To be eligible, your current FHA loan must:

• Have closed less than three years ago
• Be up-to-date on all mortgage payments with no serious delinquencies
• Not have entered foreclosure
• Not be an assumed FHA mortgage

Other things to note:

• You must refinance into another FHA loan to receive an MIP refund
• MIP refunds will be applied to the UFMIP on the new FHA refinance loan
• For FHA Streamline Refinances, MIP refunds are available after the 7-month waiting period required for these loans
• Your refinance loan closing must happen by the end of the 36th month after the current FHA loan was opened

See if you're eligible for a FHA refinance loan (Sep 16th, 2024)

Can I get the FHA MIP refund in cash?

FHA MIP refunds are not eligible as cash refunds. Rather, they are credited directly toward the UFMIP on your new FHA loan. 

The HUD underwriting guidelines state: “If the borrower is refinancing his/her current FHA loan to another FHA loan within 3 years, a refund credit may be applied to reduce the amount of the UFMIP paid on the refinanced loan.”

Who do I contact with questions regarding my MIP refund?

The U.S. Department of Housing and Urban Development (HUD) is the administrator of FHA loans. HUD has created a Mortgage Insurance Premium Refund Support Service Center where you can ask questions about mortgage insurance refunds. You can contact HUD with your questions in one of the following ways:

• Call 1-800-697-6967
• Email sf_premiums@hud.gov
• Search their database

To search this database, you will need your FHA case number which should be part of your original loan documentation.

Upfront mortgage insurance premiums vs. annual insurance premiums

In addition to the upfront mortgage insurance premiums of 1.75 percent, all FHA loans charge an annual FHA mortgage insurance premium. Each premium charges a different percentage on the base loan amount and has specific requirements.

These annual premium amounts vary based on your loan term and down payment amount:

• 30-year loan with less than 5 percent down: Annual fee of 0.85 percent for the entire loan term
• 30-year loan with 5 to 10 percent down: Annual fee of 0.8 percent the entire loan term
• 30-year loan with 10 percent or more down: Annual fee of 0.8 percent for 11 years 
• 15-year loan with less than 10 percent down: Annual fee of 0.7 percent for the entire loan term
• 15-year loan with 10 percent or more down: Annual fee of 0.45 percent for 11 years

The FHA divides these annual fees into 12 monthly installments. Each monthly mortgage payment will include an MIP installment. 

For example, a loan of $200,000 with an annual fee of 0.85 percent requires $1,700 in annual insurance fees the first year. To cover this cost, the FHA will add about $142 to each monthly payment.

Keep in mind all FHA insurance premiums are calculated based on your loan amount which, because of your down payment, should be smaller than your home’s purchase price. In addition, while your MIP rate stays the same, the actual amount you owe each year will go down as you pay off your loan balance over time. 

FHA MIP refund FAQs

How is FHA MIP refund calculated?

The partial refund of your upfront mortgage insurance premium grows smaller by 2 percentage points each month. After 36 months, you’re no longer eligible for an MIP refund. Scroll up to see a chart of refund amounts by month.

Can you get money back on an FHA loan?

The Federal Housing Administration insures a cash-out refinance loan. Like all cash-out refis, this loan works by borrowing against the home equity you’ve built up. If you have enough equity to meet the FHA’s and your lender’s rules, you can get cash back at closing.

Is an FHA upfront mortgage insurance premium refundable?

Part of your FHA loan’s upfront mortgage insurance premium can be reused if you refinance into another FHA loan within three years. The amount of your FHA MIP refund grows smaller each month.

How is FHA MIP calculated?

The FHA’s MIP adds 1.75 percent of the loan amount to your loan upfront. This fee can be paid as part of your loan’s closing costs or it can be rolled into the loan amount. The FHA also charges an annual mortgage insurance premium. For borrowers with 30-year terms who made the minimum down payment of 3.5%, the annual MIP will tack on 0.85 percent of the loan amount each year.

How do I get my FHA MIP refund?

Most FHA-authorized mortgage lenders will automatically apply your FHA MIP refund to your new MIP amount due. If you’re refinancing your FHA loan into another FHA loan, ask your loan officer to make sure your refund gets applied to your new upfront MIP.

Can you get money back on an FHA loan?

If you have enough home equity, you can get a cash-out refinance to borrow against your equity. FHA purchase and Streamline Refinance loans do not allow cash back at closing.

Can FHA MIP be removed?

Your FHA loan’s annual MIP will remain for the life of the loan unless you put more than 10 percent down. In that case, the premium goes away after 11 years. You can also refinance into a conventional loan to eliminate MIP. Conventional loans will not require private mortgage insurance (PMI) if you have at least 20 percent in home equity. In addition, you’ll need a credit score of at least 620 to refinance into an FHA loan.

Apply for an FHA refinance before your refund expires

Current interest rates have slowed the demand for refinance loans.

Meanwhile, home values have continued to rise in many markets, creating more equity for more homeowners.

If you’re thinking about getting an FHA refinance, you may be able to save money through an FHA MIP refund.

See if you're eligible for a FHA refinance loan (Sep 16th, 2024)

The post FHA MIP Refund Chart & Guide | 2024 Mortgage Insurance Premiums first appeared on My Mortgage Insider.

What is an FHA cash-out refinance?

There are two primary FHA refinance loan programs: the FHA cash-out refinance and the streamline refinance. The FHA cash-out loan provides cash-in-hand for the borrower. You open a loan with a bigger balance than what you currently owe, and the excess proceeds go to you.

Because it’s a riskier product for lenders, the FHA cash-out refinance loan requires more documentation than does the FHA streamline refinance. An FHA streamline refinance loan allows you to refinance to a lower rate with little documentation, but it doesn’t allow any cash to the borrower.

Check today's FHA cash out rates here (Sep 16th, 2024)

In this article:

• Benefits of a FHA cash-out refinance
• Credit score and LTV requirements
• Conventional cash-out vs. FHA cash-out
• FHA cash-out refinance guidelines
• FHA cash-out refinance requirements
• FHA cash-out refinance FAQ
• Our recommended refinance lenders

Benefits of an FHA cash-out refinance

As the name implies, the greatest benefit of an FHA cash-out refinance is to put extra cash in the borrower’s pocket. These funds can be used for any purpose such as:

• Home improvement expenses
• Education costs
• Buying a new car or paying off a car loan
• Consolidating credit card balances
• Creating cash for savings or investment

For example, if you owe $100,000 on your home you could open an FHA cash-out loan for $150,000, assuming your home has adequate equity and you qualify for the loan. If closing costs were $5,000, you could end up with an extra $45,000 in your pocket.

These loans may also be used to simultaneously lower the interest rate and/or change the loan term (30-year fixed to a 15-year fixed). Loans may even change from an adjustable-rate mortgage (ARM) to a steady fixed-rate loan.

Click here for today's FHA cash out rates (Sep 16th, 2024)

FHA cash-out refinance credit scores & LTV

Compared to conventional cash-out loans, FHA cash-out loans have relaxed guidelines that allow borrowers with lower credit scores and higher debt-to-income ratios to qualify.

The minimum credit score for FHA loans is 500, assuming a 10% down payment. FHA cash-out refinances require 15% equity (the same as a 15% down payment). So, in theory, you need a 500 credit score to qualify.

However, most lenders require a much higher credit score since cash-out financing is riskier than even a home purchase. You’ll probably need a minimum score between 600 and 660 to qualify for FHA cash out.

FHA cash-out maximum loan-to-value (LTV) is 80 percent of the home’s current value (a new appraisal is required) compared to the maximum conventional cash-out LTV of 80 percent. The higher limit is why many homeowners choose an FHA refinance instead of a conventional one.

For example:

• Current home value: $250,000
• Existing loan balance: $187,500
• Maximum conventional cash-out loan: $200,000
• Maximum FHA cash-out loan: $200,000

After paying off the existing loan plus closing costs, homeowners would receive about $10,000 cash for a conventional cash-out versus $21,000 for an FHA cash-out. That extra $11,000 may be enough for many homeowners to choose the FHA cash-out option.

Conventional cash-out refinance vs. FHA cash-out refinance

FHA cash-out loans also have their disadvantages.

All FHA loans require both an upfront mortgage insurance premium and a monthly insurance premium. The upfront mortgage insurance premium is 1.75% of the loan amount. For a $200,000 loan, that’s $3,500 in additional principal added to your loan amount.

Additionally, FHA requires monthly mortgage insurance which would be 0.80% of the loan amount per year on a loan with an 85 percent loan-to-value ratio. That’s $67 per month for every $100,000 borrowed.

Because of these extra costs, you should consider a conventional cash-out refinance if your home has significant equity. Conventional loans at or below 80 percent loan-to-value do not require upfront or monthly mortgage insurance.

Check your FHA eligibility (Sep 16th, 2024)

FHA cash-out refinance guidelines 2024

Income

The FHA cash-out refinance requires sufficient income to qualify for the new loan. Borrowers must verify their income with at least two most recent paycheck stubs from their employer showing current and year-to-date earnings, W-2 forms from the last two years, and in many instances, the two most recently filed federal income tax returns.

Assets

Asset verification in the form of bank and investment statements are typically not a requirement for an FHA cash-out refinance loan as no funds are needed in order to close the transaction. However, this does not mean the FHA lender cannot request bank statements as part of their internal underwriting guidelines.

Appraisal

The FHA lender evaluating an FHA cash-out loan application will require an appraisal report on the subject property. The value on the appraisal is used to determine the maximum allowable loan amount for an FHA cash-out loan. Currently, the maximum loan amount for an FHA cash-out refinance is 80 percent of the value of the property as long as the home was purchased more than one year ago and does not exceed FHA’s county-by-county loan limits.

Credit

The minimum credit score for all FHA loans is 500. While there is no minimum credit score established by the FHA for cash-out loans specifically, lenders will typically have their own internal requirements that are much higher than the minimum. The minimum credit score requirement for an FHA cash-out refinance is usually between 620 and 680. Check with a lender to see if your FICO score is high enough.

Click here to request a free FHA cash-out rate quote (Sep 16th, 2024)

FHA cash-out refinance requirements 2024

• 600 credit score or higher (varies by lender)
• Must be an owner-occupied property
• Loan-to-value (LTV) ratio must to exceed 80 percent
• No more than one late payment in past 12 months
• Existing mortgage must be at least six months old
• Debt-to-income (DTI) ratio below 41 percent
• Non-occupant co-borrowers may not be added

Occupancy. FHA cash-out refinance loans are for owner-occupied properties only and cannot be used for rental properties.

Payment history. To qualify for an FHA cash out, you may not have more than one mortgage payment that was more than 30 days late in the last 12 months. The existing mortgage must be at least six months old and have a verified payment history, usually determined by the borrower’s credit report.

Length of ownership. If you’ve lived in the home less than a year, the FHA lender will use the lower of the appraised value or the original purchase price of the home to determine your maximum loan amount. For example, if you purchased the home less than a year ago for $250,000 and it now appraises for $270,000, your maximum loan amount will be $200,000 (80 percent of $250,000).

Debt-to-income ratio. FHA cash-out loans require the borrower to meet existing debt-to-income ratio guidelines. The maximum FHA debt ratio guidelines are 29 and 41, but may be higher in certain instances. The first ratio, 29, is the housing ratio calculated by dividing the total housing payment with gross monthly income. The housing payment includes principal and interest, taxes, insurance, monthly mortgage insurance premium and any condo or homeowner association fees. For example, if the housing payment is $2,000 and monthly income is $7,000, the housing debt ratio is 28.5%.

The total debt ratio limit is 41 and includes the housing payment plus additional monthly credit obligations. Additional credit obligations include credit card payments, automobile or student loans, and installment debts. Other qualifying debt includes spousal or child support payments. This number does not include utilities, car insurance, or other non-debt payment types.

A borrower with $7,000 per month income may have a house payment up to $2,030 per month and monthly credit obligations of up to $840 per month.

Co-borrowers. Non-occupant co-borrowers are allowed on an FHA cash-out refinance loan as long as the non-occupant co-borrowers are on the original note. Non-occupant co-borrowers may not be added to the loan application to help the primary borrower qualify.

Click here to see today's FHA cash out refinance rates (Sep 16th, 2024)

FHA cash-out refinance FAQ

How much lower does my new rate have to be in order to qualify for an FHA cash-out loan?

There is no requirement that your new rate be lower by a specific amount, but the lender may require that there be a tangible benefit to you by refinancing. This benefit may be the cash itself, a lower payment, reducing your loan term, or changing from an adjustable rate or hybrid loan into a fixed-rate mortgage.

Is there any way to eliminate the mortgage insurance premium on an FHA loan?

The upfront FHA mortgage insurance is always required and cannot be changed. However, your lender may be able to adjust your interest rate upward and give you a credit from the excess profit from the loan, to help pay the 1.75% upfront mortgage insurance premium.

Can I refinance my conventional mortgage into an FHA cash-out loan?

Yes, you may. However, the FHA cash-out limit is 80 percent of the value of the home and requires a mortgage insurance premium to be paid. Consider the additional closing costs with an FHA cash-out loan and compare the FHA option with a conventional loan.

Check today's FHA cash out rates here (Sep 16th, 2024)

I’m not sure how much cash out I need. How do I determine that?

Your FHA loan will be limited both by the 80 percent loan-to-value ratio as well as your local loan limits established by FHA. With that limitation in mind, figure out how much cash you need for your specific goal. Tell your loan officer that number, and he or she will work backward, figuring in closing costs, to come to a sufficient loan amount (assuming all loan qualification factors make the desired loan amount possible).

If you only want to pull cash out of your property, but want to avoid the extra costs of a full refinance, consider obtaining a home equity loan instead. Many local and national banks are now offering second mortgages, which are a cheaper option than refinancing.

How late can a payment be in the past 12 months and still qualify?

Mortgage payments are typically due on the first of the month and considered past due after the 15^th of the month. Only payments that are more than 30 days past the original due date are considered “late.” Any payments made before 30 days past the due date are not counted against you, as long as your lender received the payment on time and did not report your payment late to the major credit bureaus.

I bought my property four months ago and I think it’s worth a lot more now. Can I refinance?

Properties owned less than six months are not eligible for a FHA cash-out refinance. You must wait at least six months. However, if your property has appreciated significantly in six months, the FHA lender will use the original sales price of the property or a new appraisal, whichever is lower. If you put the minimum 3.5 percent as a down payment six months ago, a lender will question why the property value has increased in such a short period of time.

What is the FACOP Refi initiative?

FACOP is an acronym for Federal Assistance Cash-Out Program, and some have recently begun to use the term interchangeably to describe an FHA cash-out refinance. Users searching for “FACOP refi” should be cautious of online scams offering free money to applications; the only legitimate FHA cash-out refinance is the one backed by the federal government and insured by the FHA.

Ready to apply for an FHA cash-out mortgage?

An FHA cash-out refinance can be a great idea when you’re in need of cash for any purpose. With today’s low rates, this loan type is a very inexpensive way to borrow money to achieve your goals.

Apply for the FHA cash-out refinance here (Sep 16th, 2024)

The post FHA Cash-out Refinance 2024 | Tap Into Your Home Equity first appeared on My Mortgage Insider.

With this refinance option, homeowners can get approved with no home appraisal and no credit check. This speeds up the approval process and lowers closing costs.

But these loans still require refinance closing costs, and paying them can be a big hurdle for homeowners.

Check your FHA streamline refinance eligibility. Start here (Sep 16th, 2024)

FHA doesn’t allow closing costs to be added to a new refinance loan

Many mortgage loans — like a conventional refinance — allow borrowers to finance closing costs into the new mortgage refinance loan to reduce out-of-pocket expenses.

Because the FHA Streamline Refi requires no home appraisal, the rules for loans backed by the Federal Housing Administration are a little different. Instead of basing the loan’s size on the loan-to-value ratio, the FHA streamline refinance bases its loan size on the home’s current FHA loan size.

Specifically, the lender subtracts the FHA MIP refund from the current unpaid principal balance, then adds on the new upfront MIP costs.

(Current unpaid principal balance) – (FHA MIP refund) + (New upfront MIP cost) = New maximum loan amount

FHA streamline refinance maximum loan calculation

For example, assuming a current FHA loan closed 12 months ago with a current loan balance of $150,000, the new loan amount would be as follows:

• Current balance: $150,000
• Upfront MIP refund due to borrower: $1,522
• New upfront MIP due: $2,625
• Max new loan amount: $151,103

The new maximum loan amount does not leave room for financing in closing costs. For an FHA Streamline Refinance, typical closing costs range between $1,500 and $4,000. Though, closing costs can vary widely depending on the lender, borrower characteristics, and the loan amount.

The good news is that you don’t always have to pay these closing costs out of pocket.

Lender-paid closing costs on an FHA Streamline Refinance

Streamline loans are in high demand with lenders — overall, they take less time and fewer resources to process compared to other loan types. Lenders also don’t have to order a home appraisal. This minimizes the risk of wasted time and energy if the home’s value does not appraise for the expected amount.

Lenders also don’t have to do income verification for the new loan. They don’t have to calculate your debt-to-income ratio. If you’ve been paying your monthly mortgage payment, lenders assume you’ll continue to do so when you have a lower monthly payment.

These factors add up to lenders wanting a lot of FHA Streamline Refinance business, and that’s good news for consumers. By getting multiple quotes from multiple lenders, banks and mortgage companies have to compete. This gives FHA Streamline Refinance applicants the leverage to reduce their out-of-pocket expenses.

For example, an FHA applicant gets two FHA streamline quotes at 7%. One lender quotes $3,000 due at closing; the other lender quotes $2,000. The borrower can, and should, negotiate using lower closing costs with the higher-priced lender.

By trying this method, many borrowers can drastically reduce or even eliminate their out-of-pocket costs without increasing their interest rate by rolling closing costs into the loan.

Check your FHA streamline refinance eligibility. Start here (Sep 16th, 2024)

Service release premiums give lenders the power to negotiate

Ever wonder how lenders are able to waive thousands of dollars in fees?

Lenders enjoy what’s called a service release premium (SRP). It’s a fee not disclosed on the Loan Estimate or other loan documents. Lenders collect the SRP when they sell a closed loan to a loan aggregator like Fannie Mae or Freddie Mac.

For FHA lenders, the aggregator is Government National Mortgage Association, or GNMA, which is owned by the U.S. government. (GNMA pools together loans and sells them off as securities to investors, who enjoy collecting the interest the borrower pays over the life of the loan.)

The SRPs that the lenders collect from these aggregators can add up to thousands of dollars. This money could be applied to pay for all or part of the borrower’s closing costs. The closing costs still exist, but the borrower isn’t required to pay them or is reimbursed any cost paid upfront.

FHA Streamline Refinance applicants have the power to lower their FHA closing costs by negotiating with the lender to pay them. It never hurts to ask.

FHA Streamline Refinance Closing Costs

Most homebuyers and refinancers know how to compare interest rates between different lenders, but many loan shoppers don’t think as much about closing costs and fees.

Closing costs can vary a lot by lender, too. Some charges are set in stone, but others aren’t. For example, loan origination fees can vary from 0% to 1% of the loan amount. If you’re refinancing a $200,000 loan, 1% would add $2,000 in closing costs; 0.5% would add only $1,000.

What’s the easiest way to compare closing fees? Get Loan Estimates from at least two lenders. All FHA lenders’ Loan Estimates should appear on a standardized form, making these charges easy to compare.

Are there closing costs with an FHA Streamline Refinance?

FHA Streamline Refinance loans are faster, easier — and less expensive — than most refinance loans. But they still require closing costs.

Any type of refinance will incur closing fees. Even when the lender advertises no closing costs, the costs still exist, and most often, they’re still being paid by the borrower in the long run — unless you negotiate, specifically, for your FHA lender to lower its fees.

Even when you pay closing costs, the benefits can still outweigh the costs if your new loan saves money every month.

Typical closing costs with an FHA Streamline Refinance

In addition to the fees listed below, qualifying borrowers are also required to prepay some expenses like taxes and homeowners insurance. The borrower’s current lender typically sends a refund of a similar amount when the loan closes. This means the net cost for borrowers is often close to zero for prepaid items.

*This is a list of possible fees for an FHA streamline refinance. While not an all-inclusive list, it should give you an idea of general closing costs.

Your loan could require higher or lower fees depending on the lender, the loan amount, and your credit score among other loan factors. The only way to get an accurate estimate is to get a Loan Estimate from a lender to see their quoted costs. Once you get this estimate from at least two lenders, then you can start to negotiate your fees.
While these costs may seem large, keep in mind the amount of money the lender collects in SRP at closing — this gives the borrower the power to negotiate.

Check your FHA streamline refinance rates. Start here (Sep 16th, 2024)

Can you refinance from an FHA loan to a conventional loan?

If you have an FHA loan, it’s possible to refinance to a conventional loan once you have 5% equity in your home.
If you meet the home equity eligibility requirements, refinancing to a conventional loan can give you the benefit of lower interest rates and allow you to get rid of your private mortgage insurance (if you have at least 20% equity in your home).

But just because it’s possible to refinance from an FHA loan to a conventional loan, it might not make financial sense for your situation. You’ll need to consider the net tangible benefit for your personal finances. Plus, this will require you to provide asset verification and you will probably need to pay for a new home appraisal.

Meanwhile, an FHA Streamline Refinance can help you quickly drop the monthly payment on your existing FHA loan and without so much documentation or an appraisal.

Who can use an FHA Streamline Refinance?

The FHA Streamline Refinance program works only for current FHA loan holders. And, it won’t work for every FHA homeowner.

To use this refinance option, a homeowner must be able to benefit from it. Benefits include getting a lower monthly mortgage payment or changing from an adjustable-rate mortgage to a fixed-rate mortgage.

And, of course, the homeowner must be living in the home as a primary residence. The Department of Housing and Urban Development (HUD) requires this of all FHA borrowers.

Two types of FHA Streamline Refinance loans

The FHA offers two different types of Streamline Refinance loans:

• Non-credit Qualifying Streamline Refinance: Lenders won’t have to check your credit score or income. Your payment history will show whether you’re qualified. Avoid late payments in the year leading up to your refinance
• Credit Qualifying Streamline Refinance: With this option, the lender will check your personal finances to make sure you’re approved to borrow. This will be necessary to add a new co-borrower or remove a co-borrower from your loan

Closing costs will likely be a little higher for a credit-qualifying loan since it requires a credit check and more thorough underwriting.

FHA Streamline Refinance Closing Costs FAQs

What is the FHA Streamline program?

An FHA Streamline Refinance loan replaces an existing FHA loan with a new FHA loan. The new loan saves the borrower money, usually by replacing a higher interest rate loan with a lower rate loan. Streamline Refis can also lower monthly payments by extending the loan term, though the FHA won’t allow adding more than 12 years to the term.

Are there closing costs with an FHA Streamline Refinance?

Yes, lenders still charge loan origination fees and other lender’s fees. Borrowers also pay third party fees like title insurance and attorney’s fees. Most borrowers will need to pay prorated property taxes or insurance premiums.

How much does it cost to do an FHA Streamline Refinance?

Costs vary by lender, loan, and borrower. Expect to pay $1,500 to $4,000 for the typical Streamline Refi.

Does an FHA Streamline Refinance get rid of PMI?

No. FHA loans don’t charge private mortgage insurance (PMI). Instead, they require the FHA’s Mortgage Insurance Premium (or MIP). Unless they make a down payment of 10% or more, FHA homebuyers pay MIP for the life of the loan. MIP is required on an FHA Streamline Refinance.

What are the cons of an FHA Streamline Refinance?

Unless your current mortgage is an FHA loan, you can’t use an FHA Streamline Refinance. That’s a con. Also, this loan won’t allow cash back at closing. You’d need a cash-out refinance for that.

Is FHA Streamline Refinance a good idea?

It’s a great idea to get a Streamline Refi if the new loan saves you money every month — and if you’ll keep the home long enough for the savings to pay off. If you plan to sell the home in a year, it’s probably not a good idea to refinance now.

Can I roll closing costs into an FHA refinance?

No. An FHA Streamline replaces your current loan with a new loan that’s the same size. There’s no room to finance closing costs and there’s no room to cash out home equity. To do that, you’d need an FHA cash-out refinance.

Who qualifies for an FHA Streamline Refinance?

Existing FHA homeowners who can save money by getting a new loan can qualify for an FHA Streamline Refinance. FHA homeowners can also qualify if they need to remove or add a co-borrower or replace an adjustable-rate loan with a fixed-rate loan. To be eligible for refinancing, an existing FHA loan must be old enough for the borrower to have made at least six monthly payments.

How long does an FHA Streamline Refinance take?

FHA Streamline Refinances are quicker and easier than most other refinance types. You could close within a few weeks if everything goes as planned. However, closing times vary by lender and borrower. Some could take as long as 45 to 50 days.

FHA streamline loan borrowers aren’t hindered by closing costs

Even though the FHA Streamline Refinancing program doesn’t allow closing costs to be rolled into the new loan amount, borrowers don’t have to pay those fees out of pocket — the high demand for FHA loans gives mortgage lenders (and borrowers) more leeway to negotiate a lower rate and fee structure.

If your FHA loan’s mortgage rate is higher than the rate you could get today, there’s no reason to be paying more for your home loan than necessary — and that includes closing costs to refinance.

Check your FHA streamline refinance eligibility. Start here (Sep 16th, 2024)

The post FHA Streamline Refinance: Negotiate Zero Out-of-Pocket Closing Costs first appeared on My Mortgage Insider.

A conventional refinance is one of the most versatile loans in today’s market.

Conventional refinances can convert any type of mortgage loan into a conventional loan. Simultaneously, a conventional refi could also cash out equity.

In many areas, home prices increased over the past few years. As a result, many homeowners are eligible for a conventional refinance and could even cancel PMI to further lower their costs.

Check your eligibility for a conventional refinance. Start here (Sep 16th, 2024)

In this article:

What is a conventional refinance?
What can a conventional refinance be used for?
Conventional refinance requirements 2022
Refinancing an FHA loan into a conventional loan
Getting rid of mortgage insurance with a conventional refi
Conventional refinance rates
Conventional loan limits
Conventional refinance loan lengths
Are adjustable-rate refinances available?
Do conventional refinances require closing costs?
Conventional refinance FAQ
Our recommended refinance lenders

What is a conventional refinance?

Conventional refinances are conventional loans that replace an existing mortgage loan. The refinance replaces the old loan by paying it off. Then, the homeowner starts making payments on the refinance loan instead of the original loan.

Check your eligibility for a conventional refinance. Start here (Sep 16th, 2024)

The new loan should benefit the borrower in some way: a lower interest rate, a shorter loan term, a fixed-rate loan, or cash back from equity, for example.

Like conventional loans, a conventional refinance is not insured by a federal agency. So borrowers rely more on their credit score and debt-to-income ratio to qualify.

The most qualified borrowers get the best deal on conventional refinance loans.

What can a conventional refinance be used for?

Conventional refinances can help you meet a variety of goals:

• Refinancing a primary residence, second home, or investment property
• Turning home equity into cash at closing
• Eliminating private mortgage insurance (PMI)
• Canceling FHA mortgage insurance
• Refinancing out of any other loan type
• Reimbursing a cash home purchase
• Shortening the home loan term

Check your eligibility for a conventional refinance. Start here (Sep 16th, 2024)

Ideally, a conventional mortgage refinance will achieve two or more of these goals at once.

For example, a conventional refi could replace an existing FHA loan, eliminating the FHA’s mortgage insurance premium, while also generating cash back at closing and shortening the loan term.

But meeting at least one goal is good enough for most borrowers.

Conventional refinance requirements 2024

Qualifying for a rate-and-term conventional refinance will resemble qualifying for a conventional purchase loan. Rate-and-term loans simply replace an existing mortgage with a new loan.

Check your eligibility for a conventional refinance. Start here (Sep 16th, 2024)

To be eligible for a conventional refinance, you’ll need to have sufficient loan-to value (LTV). Many conventional programs will allow you to refinance if you have at least 5% equity — though if you have an LTV of 20% or more then refinancing could also enable you to eliminate any private mortgage insurance (PMI) you might be paying.

Along with meeting LTV, you’ll need to have a FICO score of 620 with most lenders and a debt-to-income ratio below 43%. You’ll also need to document your income by sharing a W2, pay stub, or tax returns.

Conventional cash-out refinance requirements

A conventional cash-out refinance allows you to borrow against your home equity, generating “cash back” which you could use for debt consolidation, home improvements, or any other purpose.

A cash-out refi can’t access all of a home’s equity. Borrowers have to follow the 80% LTV rule which requires leaving 20% of the equity untouched.

Check your eligibility for a conventional cash-out refinance. Start here (Sep 16th, 2024)

So if you owned a home worth $250,000, your maximum loan size would be $200,000.

If you’ve paid down your existing mortgage to a balance of $150,000, a $200,000 loan would be large enough to pay off your existing loan while also paying you up to $50,000 at closing.

But if your current loan balance was $200,000, you wouldn’t have enough equity to get cash back, even though you have $50,000, or 20%, in equity. That 20% equity has to stay in the home.

Many lenders require higher credit scores for cash-out refinance options. Some look for 660 or 640 scores instead of only 620. Interest rates also tend to be a little higher for cash-out refinances compared to rate-and-term refinances.

Refinancing an FHA loan into a conventional loan

First-time home buyers — and other buyers with lower down payments and average credit scores — might need an FHA loan to buy a home.

Check your eligibility for a conventional refinance. Start here (Sep 16th, 2024)

But FHA borrowers pay FHA insurance. This FHA mortgage insurance premium (MIP) adds 1.75% of the loan amount upfront. Then, most borrowers pay another 0.85% of the loan’s amount each year in MIP.

Refinancing to a conventional loan can enable FHA borrowers to eliminate mortgage insurance premiums.

Conventional refinances eliminate FHA MIP

For most current FHA loan holders, the best way to stop paying MIP is to refinance their FHA loan into a conventional loan, exiting the FHA loan program altogether.

Check your eligibility to eliminate FHA MIP. Start here (Sep 16th, 2024)

As long as the FHA homeowner has at least 20% equity — and can meet a conventional lender’s credit and debt-to-income ratio rules — the new conventional refi won’t need any mortgage insurance.

Of course, the homeowner should make sure the new loan will actually save money compared to the existing FHA loan. A borrower who barely qualifies for a conventional loan may not see much, if any, savings. In fact, a refinance might cost more.

To find out for sure, get a mortgage preapproval from a few different lenders. Preapprovals show your monthly mortgage payments and long-term costs.

Getting rid of mortgage insurance with a conventional refi

Conventional loans charge monthly mortgage insurance, too. When home buyers make down payments less than 20%, lenders require private mortgage insurance, or PMI.

Verify your eligibility for a conventional refinance. Start here (Sep 16th, 2024)

PMI rates vary by borrower. They usually range from 0.5% to 1.5% of the loan amount per year. For a $250,000 loan, a 1% PMI rate would cost $2,500 a year, or about $208 a month.

The good news is that you won’t have to refinance out of this extra cost. Once your loan balance falls to 80% of your home value, you can cancel PMI and stop paying for it.

Federal law requires your lender to cancel PMI once your loan balance falls to 78% LTV. If you think you’ve already met this requirement but your lender disagrees, check with your loan servicer about getting a new home appraisal.

Can I refinance out of PMI?

Conventional borrowers who want to get rid of PMI sooner by refinancing have a couple of loan options:

• Refinancing into loans that don’t require PMI: Some lenders offer private, in-house loan programs that don’t charge PMI. But these loans usually charge higher interest rates. So the savings might be minimal or nonexistent.
• Cash-in refinancing: Bringing cash to closing could drop a home’s LTV low enough to eliminate PMI. But there are closing costs to pay, and they cut into the savings. Plus, you might have to part with a lot of cash.

Most conventional loan holders will find it’s best to wait. When they’ve paid their loan down to 80% LTV, they can cancel PMI without paying closing costs or higher rates.

Conventional loan refinance rates

Almost every refinance shopper will get a different rate based on their financial situation.

For instance, a customer refinancing a rental property will get a rate that’s up to 0.5% higher than someone who is refinancing a single-family primary residence.

Check your eligibility for a conventional refinance. Start here (Sep 16th, 2024)

Likewise, someone with a 660 score will pay about 0.25% more than a customer with a 700 score.

In short, conventional loan refinance rates are based on risk to the lender.

Unlike federally insured loans, which insulate borrowers from the effects of this risk, you’ll get the best conventional refinance rate by being a low-risk borrower.

Lower-risk borrowers can refinance into rates that are below today’s average mortgage rates. And since a refi with 80% LTV requires no private mortgage insurance, a conventional refi’s APR will be lower, too.

Connect with a lender to start your conventional refinance application (Sep 16th, 2024)

2024 conventional loan limits

The standard conventional loan limit is $766,550. A qualifying refinance applicant can open a loan for at least this amount anywhere in the country.

But Fannie Mae and Freddie Mac allow higher limits in some areas where real estate costs more.

Check your eligibility for a conventional refinance. Start here (Sep 16th, 2024)

For instance, San Diego has a conventional loan limit of $1,149,825. Refinance consumers in Seattle and Queens, New York, can also be approved for a higher conventional loan.

The highest limit in the country is available in Honolulu, Hawaii, which is even higher than the limit in San Diego.

Homeowners in areas with high housing costs should check their conventional loan limit before they assume they need a jumbo loan.

Homeowners who refinance multi-unit homes have access to higher loan limits:

• The conventional loan limit for a 1-unit home: $766,550
• The conventional loan limit for a 2-unit home: $981,500
• The conventional loan limit for a 3-unit home: $1,186,350
• The conventional loan limit for a 4-unit home: $1,474,400

Homeowners with multi-unit homes that are also in high-cost areas can receive conventional loans of over $1.2 million.

Keep in mind that these are loan limits, not home price limits. Someone refinancing a $2 million home could receive a conventional loan of $766,550 in any area of the country.

What conventional refinance loan lengths are available?

The most popular conventional refinance loan terms are 15 and 30 years.

A 15-year fixed-rate mortgage will require higher monthly mortgage payments compared to a 30-year fixed loan. But long-term interest charges will be lower with a 15-year term.

Check your eligibility for a conventional refinance. Start here (Sep 16th, 2024)

Borrowers can also find 10- and 20-year mortgages, though they are less common. Some lenders will customize a conventional refinance’s term.

In general, longer terms make for lower payments but more interest.

Check your mortgage rates. Get started here

Are adjustable-rate mortgages available?

Yes, borrowers can refinance into an adjustable-rate mortgage (ARM). These loans have fixed rates for the first three, five, seven, or 10 years.

Check your eligibility for a conventional refinance. Start here (Sep 16th, 2024)

During this initial fixed period, the rate is typically lower than the rate you could get on a 30-year fixed-rate loan. After the intro rate expires, rates and payments can change each year.

ARMs are great for homeowners who plan to move, refinance again, or pay off their mortgage in a few years.

Do conventional refinances require closing costs?

Just like home purchase loans, refinance loans charge closing costs. These costs include loan origination fees and legal fees. Closing costs could also include a home appraisal fee and prorated property taxes and homeowners insurance premiums.

Check your eligibility for a conventional refinance. Start here (Sep 16th, 2024)

Closing costs usually range from 2% to 5% of the loan amount. That’s $2,000 to $5,000 for every $100,000 borrowed.

Some lenders advertise no-closing-cost loans. These loans normally charge higher interest rates which reimburse the lender for your closing costs.

How do I get a conventional cash-out refinance?

A cash-out refinance pays the borrower cash at closing. The cash out is borrowed from the home’s equity and must be repaid as part of the new loan’s monthly mortgage payments.

Here’s how it works: If a homeowner owes $100,000 on a home that’s worth $200,000, the homeowner can apply for a loan amount bigger than what they owe. The difference between the two loans goes to the homeowner.

Most lenders can approve a cash-out loan up to 80% loan-to-value ratio. So a homeowner who has 30% equity can take up to 10% of the home’s value in cash with a cash-out refinance.

Cash-out refinance rates are slightly higher than no-cash-out loans. The difference is usually about 0.125% — or about $10 more per month in interest for every $100,000 borrowed.

Considering the relatively low cost, a cash-out loan can be a great way to consolidate high-interest debt and get monthly expenses under control. For many households with a lot of debt from student loans, credit cards, and car loans, a cash-out loan may reduce payments by many hundreds of dollars per month.

Check your cash-out refinance rates. Start here (Sep 16th, 2024)

Conventional refinance FAQ

Do I need to have a conventional loan to do a conventional refinance?

No. You can refinance any type of loan with a conventional loan. You can refinance FHA loans, USDA mortgages, Alt-A loans, subprime loans, option ARMs, and adjustable-rate mortgages.

My appraisal shows a lower value than expected. Can I still refinance with a conventional loan?

Possibly, but the refinance may require monthly mortgage insurance. It’s best to have 20% equity in your home before refinancing with a conventional loan.

I’m not sure about my credit. Should I apply for an FHA loan first?

You don’t have to pick one loan program when applying for a new loan. Your loan officer will look at your entire situation and try for the lowest-cost option. If a conventional loan doesn’t work out, the lender may switch you to an FHA loan. Don’t automatically rule out a conventional loan just because of your credit standing.

Can I refinance from an FHA to a conventional loan?

Yes. If you have sufficient equity and a credit score of 620 or higher, you can likely refinance to a conventional loan.

Why get a conventional loan? Why not refinance with FHA?

FHA can be used to refinance, but it’s typically for homeowners who can’t qualify for a conventional refinance due to past credit issues. Because of its flexibility, an FHA refinance is more expensive. Homeowners who don’t need the FHA’s flexibility can save money with conventional refinancing.

How do I apply for a conventional loan refinance?

Applying for a conventional refinance is just like applying for any other refinance.

Start by checking rates here. The lender will guide you through the rest of the process.

What is a conventional refinance?

A conventional refinance is a new conventional loan that replaces an existing mortgage on a house you’ve already bought. Unlike an FHA Streamline Refinance, which can be used only if you already have an FHA loan, a conventional refinance can replace any other mortgage type.

Can you refinance a conventional loan?

Yes, homeowners can refinance their conventional loans. Refinance loans are worth the time and money when they achieve a goal such as lowering your mortgage rate or monthly payments.

How soon can I refinance an FHA loan to a conventional loan?

FHA borrowers can refinance into conventional loans as soon as they have 20% equity in their home and a credit score of at least 620. Conventional lenders usually look for debt-to-income ratios of 43% or lower. These standards are stricter than FHA loan requirements.

How soon can you refinance a conventional loan?

There’s no waiting period for refinancing a conventional loan. However, it’s often best to wait until you have 20% equity in the home. If you made a 20% down payment, you should already have 20% equity.

Can you refinance an FHA loan to a conventional loan?

Yes, conventional refinances can replace loans of any type, including FHA, USDA, and VA loans.

Is a conventional refinance better than an FHA Streamline Refinance?

Not necessarily. But FHA Streamline Refinances work only for current FHA loan holders. They’re a great way to save money without going through the full credit underwriting process. Unless you have an FHA loan now, you couldn’t get an FHA Streamline Refi.

Can I get a conventional adjustable-rate refinance?

Yes, and these loans are becoming more popular as mortgage rates have bounced back from the historic lows of the pandemic. ARMs are more popular because they start out with a lower-than-average mortgage rate. Later, the rate will fluctuate with the market.

How much equity do I need to refinance to a conventional loan?

It’s possible to refinance a conventional loan with as little as 3% home equity. However, it may be best to aim for 20% equity before a conventional refinance. This would help you qualify for a lower mortgage interest rate and cancel private mortgage insurance, further reducing your monthly payments.

How do you qualify for a conventional refinance?

Conventional borrowers typically need FICO credit scores of at least 620, a debt-to-income n caratio no higher than 43%, and at least 20% in home equity. If you meet these requirements, shop around with at least three mortgage lenders so you can compare rates.

What does ‘conventional’ mean?

Conventional mortgages are home loans that are regulated by Fannie Mae and Freddie Mac. These two companies buy most conventional loans from lenders. Since they control the mortgage market, they make the rules for what qualifies as a conventional loan — also known as a conforming loan. Most home buyers use conforming loans.

Get started on your conventional refinance now

Not sure where to start with your conventional refinance?

A mortgage preapproval is a great place to begin. The preapproval process requires a soft credit check which won’t hurt your score.

It’ll show what rates you qualify for and how much you could save.

Connect with a lender to start your conventional refinance application (Sep 16th, 2024)

The post Conventional Refinance | Rates, 2024 Loan Limits & Guidelines first appeared on My Mortgage Insider.

Also, if your FHA loan is under three years old, then you may be eligible for an upfront mortgage insurance premium refund. This refund allows a portion of the original loan’s paid premium to be applied to the upfront mortgage insurance premium of the new FHA streamline refinance loan. This means less money is required at closing.

Check your FHA streamline refinance eligibility today (Sep 16th, 2024)

In this article:

• Is an FHA streamline refinance worth it?
• Do I qualify for an FHA streamline refinance?
• FHA refinance rates today
• Our recommended refinance lenders
• How does an FHA streamline refinance work?
• What documents do I need?
• Closing costs for FHA streamline refinances
• Net Tangible Benefit requirement
• FHA mortgage refund
• FHA streamline refinance FAQ

Is an FHA streamline refinance worth it?

In general, FHA streamline refinances are worth it if there’s a financial benefit to you like a lower interest rate and monthly payment. This is true of all refinances — if it’s not going to benefit you, then it’s likely not worth it.

Streamline refinances offer some specific advantages when compared to other refinance loan types, including:

• No income documentation is required like pay stubs and W2s
• Lower available interest rates
• Faster closing times than traditional refinances
• No appraisal is required
• Underwater homes are eligible
• Potentially eligible for a partial refund of upfront mortgage insurance from your original loan

Check FHA streamline rates. Start here (Sep 16th, 2024)

Do I qualify for an FHA streamline refinance?

FHA streamline refinance loans are available to homeowners who currently have an FHA loan with good payment history. Homes that have lost value and are now underwater are eligible too.

The most important qualification though, is that borrowers must receive a benefit from refinancing. This is called a net tangible benefit — FHA refinances can be approved if the combined interest rate drop is at least 0.5% (see Net Tangible Benefit section below).

FHA refinance rates today

The refinance interest rate you’ll qualify for depends on factors like your credit score, interest rate type, and loan type. You’ll have to speak to lenders to determine the specific FHA refinance rate you’re eligible for. Compare quotes from three to four lenders to make sure you’re getting the best rate and terms — the CFPB reports that comparison shopping can save borrowers approximately $300 per year and thousands over the life of the loan.

Check current rates here.

How does an FHA streamline refinance work?

In general, FHA streamline refinances are easier to qualify for than home purchase loans. If you meet five key requirements, then your FHA streamline refinance will likely be approved. Those key requirements include:

1. On-time payment history

You must show a history of on-time mortgage payments for your existing FHA loan to qualify for an FHA streamline refinance. If you have had a late payment, you are not automatically disqualified though. You can rebuild your history moving forward and qualify 12 months after your second most recent late payment.

FHA streamline refinance loan payment requirements:

• If your mortgage is less than 12 months old, then all mortgage payments must have been paid on time.
• If your mortgage is 12+ months old, then no more than one payment is permitted to be 30+ days late. The three months’ payments prior to the loan application must have been made on time.

2. Net Tangible Benefit

All FHA streamline refinances must result in a Net Tangible Benefit (NTB) for the borrower — the refinance must improve the borrower’s financial position as defined by the FHA. Generally, NTB is defined as reducing the borrower’s “combined rate” by at least 0.5%. (A combined rate is the interest rate of the loan plus the insurance premium rate.)

For example, a homeowner has a current interest rate of 4.5% and an insurance premium of 1.35% for a combined rate of 5.85%. If the homeowner refinances into a 4% interest rate with an insurance premium of 1.35%, then the new combined rate of 5.35% is a 0.5% reduction.

The 0.5% “combine rate” reduction rule applies if you’re refinancing a fixed-rate mortgage into another fixed-rate mortgage. If you’re refinancing into (or out of) a one-year ARM or Hybrid ARM (3-, 5-, 7-, or 10-year ARM), then there are different NTB requirements.

Net Tangible Benefit (NTB) Combined Rate Requirements

3. FHA streamline waiting period

There’s a waiting period between when you first closed your loan and when you can refinance. So, if you’ve just closed on your loan, then you’re not eligible for an FHA streamline refinance.

The FHA streamline refinance waiting period requirements include:

• You have made at least six on-time payments on your current FHA mortgage
• It’s been at least six months since your first payment due date
• 210 days have passed since the day your current mortgage closed

For example, if your current FHA loan closed on November 28, 2018, then your first mortgage payment was due on January 1, 2019. You can refinance as soon as July 1, 2019 — 210+ days after closing and six months after your first payment.

Get your FHA streamline rate. Start here (Sep 16th, 2024)

4. Minimum credit score

The FHA does not require a credit report as part of the streamline refinance loan application. Most lenders will require one, though. A standard minimum credit score for the FHA streamline refinance program is 640. However, some lenders may allow a score between 600-620. If you’re denied, shop around.

Source: Ellie Mae Origination Report, December 2019

5. Closing costs for FHA streamline refinances

Closing costs on streamline refinances are generally the same as with other mortgages, except that there is no appraisal fee (unless you opt for one). You may also need to pay a portion of property taxes and insurance at closing.

For example, if your jurisdiction’s property taxes are due in the next few months, lenders require you pay that tax installment. Keep in mind, though, that you’ll receive a check from your current lender for taxes and insurance you’ve paid on your current loan, but haven’t been disbursed.

If you’re short on cash, then ask your lender if they offer lender credits — for a slightly higher interest rate, you can use the profits from the loan to pay for closing costs. Or, if you have equity in your home, then with an appraisal you may be able to wrap closing costs into the new loan amount.

My Mortgage Insider Tip

Are there closing costs with an FHA streamline refinance?

Generally, you can expect to pay between $1,000 and $5,000 in FHA streamline closing costs, though this amount may be higher or lower depending on your loan amount and other factors. You’ll need to provide 60 days of bank statements showing you have enough money to cover any out-of-pocket closing costs.

Your loan officer will provide an estimate of total funds due. This estimated out-of-pocket amount may increase during the mortgage refinance process, though. Be prepared to provide updated or additional bank statements to prove you have funds to cover the increased amount.

Note: Provide all bank statement pages, even blank ones, to your lender. Make sure your name, address, and account number appear on your statement too. Online bank printouts often don’t include your personal information, so you’ll need the mailed version or the PDF version of your full statement.

What documents do I need for an FHA streamline refinance?

Even though FHA streamline refinances have minimal documentation required for the loan application, that doesn’t mean there’s no documentation. Below is a list of things you’ll likely need for your refinance application, including your:

• Current mortgage statement
• Current FHA loan’s mortgage note, which shows your current interest rate and loan type
• Final settlement statement (final HUD-1) or Deed of Trust with the FHA case number of your current loan
• Employer HR department’s contact information (lenders need to verify your employment, not your actual income)
• Two months of bank statements that show you have enough funds to pay for any out-of-pocket costs
• Homeowners insurance agent’s contact information to obtain current proof of insurance

Also, make your next month’s mortgage payment as soon as possible. This allows your lender to obtain proof that your FHA mortgage is current. Your lender may require more or less than the items listed above.

Other things to note about FHA streamline refinances

While streamline refinances are generally easy to apply and get approved than other refinance options, there are some things to consider in regards to the FHA loan program.

Adjusting loan types and terms

The FHA has specific rules on what types of loan adjustments are allowed. Not every loan type can be converted to another loan type or term with a streamline refinance. Some of the most common questions on these adjustments are:

• Can I refinance my 30-year loan to a 15-year loan? No. The FHA does not allow reduction of your loan term with a streamline refinance.
• Can I refinance my 15-year loan to a 30-year loan? Yes. Your combined rate must decrease by at least 0.5%.
• Can I refinance my ARM to another ARM? Yes. You may use an FHA streamline refinance to refinance an adjustable-rate mortgage (ARM) to another ARM (for primary residences only).
• Can I refinance my ARM to a fixed-rate mortgage? Yes. Though, there are additional requirements depending on the type of ARM and the original closing date. (See the Net Tangible Benefit section.)
• Can I refinance my fixed-rate mortgage to an ARM? Yes. The combined rate requirement must be a 2% decrease.

Appraisals

There are two types of streamline refinances — those with an appraisal and those without. The majority of people opt for the no-appraisal option, because the application process is quicker, cheaper, and no equity is required.

So, why would someone get an appraisal on an FHA streamline refinance? Because you can only include closing costs in the new loan amount on streamline loans with an appraisal. Otherwise, closing costs have to be paid out of pocket (or with a lender credit).

If you order an appraisal, make sure you have enough equity in the home to cover the existing loan balance, closing costs, and any interest due. If you don’t have equity in your property, it’s best not to obtain an appraisal.

If you opt for a no-appraisal FHA streamline refinance, the maximum loan amount may include:

• The current principal balance
• Up to one month’s worth of interest payments
• The new upfront mortgage insurance fee (subtract the mortgage insurance refund if applicable — applies if FHA loan originated less than three years ago)

Mortgage insurance premiums

There are two types of mortgage insurance premiums (MIP) for FHA loans — upfront and annual. Upfront mortgage insurance premiums (UFMIP) is a one-time fee charged when you close the loan. All FHA loan types UFMIP is 1.75% on the base loan amount. Annual insurance premiums are paid over the life of the loan in most cases. Percentages vary and are dependent on the base loan amount, your down payment amount, and the loan term. (See FHA insurance premium rates.)

Mortgage insurance refunds

When you refinance a current FHA loan, you may be entitled to a refund of the upfront mortgage insurance you paid when you opened your existing FHA mortgage. Usually, refunds are only available if the FHA loan is refinanced into another FHA loan within the first three years.

The refund amount is determined by how long ago the current loan was opened, and when the new FHA refinance loan closes. The refund amount decreases each month. If you refinance within 12 months, you may be refunded as much as 60% of your original upfront mortgage insurance. But, if you refinance after 30 months, you’ll only receive about 20%.

Read more: FHA Mortgage Insurance Refund Guidelines [Chart]

FHA streamline refinance loans and condominiums

Many condominiums have lost their FHA eligibility over the past few years. FHA streamline refinances are available on condos that were approved at the initial opening of the loan, but have since lost their approval.

The exception: When an appraisal is needed to qualify for the loan. In this case, the condo complex needs to be currently FHA-approved.

Read more: How to Find an FHA-approved Condo Quickly and Easily

FHA streamline refinance loan FAQ

Is cash back allowed on an FHA streamline refinance?

Cash back is not allowed for a streamline refinance loans. For that, you’ll need to apply for an FHA Cash-out Refinance.

The FHA does permit a small amount of cash, usually less than $500, to go to the borrower. Some lenders limit the amount to $250 or less. The cash back can only be the result of incidental changes in closing calculations, which happens often with all mortgages.

Can I refinance my second home or investment property with an FHA streamline refinance?

In most cases, the FHA allows streamline refinances on second homes and investment properties as long as the property currently has an FHA loan. Some lenders only accept streamline refinances on primary residences. It’s best to ask your lender about their specific rules.

Also, if your monthly payment is increasing of the new loan type is an ARM, then you won’t be able to use a streamline refinance — they’re not permitted on second homes and investment properties.

Can I add or remove borrowers with an FHA streamline?

The FHA permits a borrower to be removed from the original loan as long as one of the original borrowers remains on the new mortgage. If you want to “assign” the loan to another borrower entirely, though, then you can’t use an FHA streamline refinance. Also, borrowers can usually be added to the title without income or asset review. Though, check with your lender specifically to see if they allow it.

Can I use an FHA streamline to refinance my completed 203k rehab loan?

The FHA allows this type of refinance without an appraisal, though, your lender may require one. The completed work must be evidenced by:

• A certificate of completion
• A final release of the rehabilitation escrow account
• The original lender’s completion of the 203k closeout process

Can I use an FHA streamline if my home needs repairs?

The FHA does not require repairs on a home that is in sub-par condition as long as there is no appraisal required for the transaction. If you opt for an appraisal (or, your lender requires one), then you will be responsible for completing those repairs before loan approval.

Check FHA refinance rates today

The FHA streamline refinance is a great option for current FHA homeowners to lower their interest rate and monthly payment. And, with lenient credit standards and documentation requirements it can be the fastest and most cost effective options to refinance an FHA loan.

Check your FHA streamline refinance eligibility (Sep 16th, 2024)

The post FHA Streamline Refinance Rates & Guidelines 2024 first appeared on My Mortgage Insider.

Check today's rates here and apply for a conventional refinance (Sep 16th, 2024)

What is FMERR?

If you’ve never heard of a Freddie Mac Enhanced Relief Refinance — a “FMERR” loan — you’re not alone. Available to homeowners since the beginning of the year, it’s a refinancing option that helps property owners with little or no equity. The trick? It ignores usual lender requirements for a high loan-to-value (LTV) ratio. This means that homeowners who have not experienced the rise in home prices or are upside down in their mortgages may be able to get a lower interest rate with the help of FMERR.

Check today's rates here and apply for a conventional refinance (Sep 16th, 2024)

Real estate prices have generally been rising — but not for everyone.

According to ATTOM Data Solutions more than 5 million U.S. properties — 8.8% — were “seriously underwater” in the fourth quarter of 2018. These are properties where mortgage balances are at least 25% higher than market values. For example, under the “seriously underwater” standard, a home that might sell for $300,000 has at least $400,000 in outstanding mortgage debt.

The FMERR program is open to homes that are seriously underwater and also those that are slightly upside down or only have a little bit of earned equity. Consider a property with a $300,000 fair market value and $298,000 in mortgage debt — it has equity, but not enough to refinance under most mortgage programs.

This not-so ideal home financing situation is problematic for homeowners.

First, homeowners cannot sell unless they pay off the outstanding mortgage debt. This means bringing a big chunk of cash to closing — cash many borrowers simply don’t have. In effect, these homes can’t be sold, which is one reason the real estate marketplace has an inventory shortage.

Second, older existing loans often have high interest rates, so borrowers have large monthly payments. But, if homeowners refinance at today’s rates, then their monthly payments may be much lower.

Lower mortgage payments are good for the lender too. Lower costs make homeownership more affordable, which translates to less risk for the lender.

Freddie Mac Enhanced Relief Refinance Qualifications 2024

Who qualifies for FMERR?

FMERR is not a come-one, come-all deal. There are some basic standards that must be met to qualify.

1. Your current loan must be owned by Freddie Mac. (You can check mortgage ownership by using the Freddie Mac Loan Look-up Tool.)
2. Your loan must have originated after November 1, 2018.
3. Your current loan financing must be “seasoned” at least 15 months. This essentially gives Freddie Mac the opportunity to see how you’ve been making payments.

There are some additional requirements that you must meet to be eligible for FMERR.

Maximum loan-to-value (LTV) ratio

There is no maximum loan-to-value (LTV) ratio for FMERR. You can be wildly underwater and still potentially qualify. If your home is worth $350,000 and you owe $375,000 FMERR may be able to help you lower your monthly payments.

With the Freddie Mac Enhanced Relief Refinance program a lack of equity is okay. In fact, it’s required. If you have enough equity to refinance with other Freddie Mac programs like its 97 LTV refinance program — you can’t use the FMERR loan.

Maximum debt-to-income (DTI) ratio

There is no maximum debt-to-income ratio for FMERR loans in most cases. However, there are some uncommon scenarios where lenders limit the DTI to no more than 45%. Those scenarios include:

• You switch from an ARM to a fixed-rate loan and your monthly payment increases at least 20%.
• You refinance a really small loan, say $50,000. Under federal rules, lenders can charge higher fees for small mortgages. The purpose of this rule is to help lenders cover fixed costs.
• The loan will have different borrowers — someone who co-signed the old loan will not be on the new one.

While Freddie Mac doesn’t have a maximum DTI, your lender might. Lenders want borrowers who do not have too much debt. They’ll compare recurring debt costs for things such as housing, auto loans, student debt, and credit card payments with your gross monthly income — the money earned before taxes. For example, if your household has $8,000 per month in gross income and your recurring monthly costs are $3,440, then your DTI is 43%, which is a DTI level acceptable for many lenders.

Payment history

You must be current on your mortgage payments in order to qualify for FMERR. You must also meet the two following standards:

1. You had no delinquencies in the past six months.
2. You had no more than one 30-day delinquency in the past 12 months.

Also, be aware of “layering” — additional requirements created by lenders above and beyond these Freddie Mac standards. Lenders use layering to reduce risk and different lenders have different appetites for risk. For example, lender A might allow no more than one delinquency in the past 18 months, while lender B is okay with one delinquency every 12 months.

Credit score requirements

No, you do not need a 720 credit score to qualify for a FMERR loan. It’s considered a streamline refinance, which replaces your existing financing with a new loan, so there’s no minimum credit score to qualify.

Other questions about FMERR

Is FMERR restricted to primary residences?

No. You can finance other properties as well. The minimum LTVs include:

Primary Residence

• 1-unit: 97.01%
• 2-units: 85.01%
• 3-4 units: 80.01%

Second Home

• 1-unit: 90.01%

Investment Property

• 1-unit: 85.01%
• 2-4 units: 75.01%

How do FMERR interest rates compare?

In general, FMERR rates are comparable with other financing options. To determine what rates you’ll qualify for, you’ll need to speak to a lender.

Will my monthly payment go down with a FMERR loan?

With a lower interest rate you will most likely see a smaller monthly payment. But, this isn’t always the case. For example, monthly payments may increase if you switch from an ARM to a fixed-rate mortgage or to a shorter-term loan.

When does the FMERR program expire?

The FMERR program is set to end September 30, 2019 — your refinance must CLOSE before this date. This means you need to apply 30-60 days beforehand to ensure the loan will close in time.

If you’re wondering whether the FMERR program will be extended, no one knows. But, it’s not something to count on. The better strategy is to apply now, while the program is unquestionably available.

Check today's rates here and apply for a conventional refinance (Sep 16th, 2024)

The post Freddie Mac Enhanced Relief Refinance (FMERR) Guidelines for 2024 first appeared on My Mortgage Insider.

But this loan program has a tradeoff: FHA mortgage insurance premiums (MIP). Someone with a $250,000 FHA loan can expect to pay about $30,000 in mortgage insurance premiums over the life of the loan. Those insurance payments can really add up.

Some FHA borrowers can get rid of their monthly mortgage insurance premiums. Others will need to refinance into another type of loan to eliminate this extra monthly expense. Here are some tips for FHA mortgage insurance removal.

See if you can cancel your FHA mortgage insurance. Start here (Sep 16th, 2024)

What is FHA mortgage insurance premium (FHA MIP)?

FHA mortgage insurance premium, also known as FHA MIP, helps keep the Federal Housing Administration (FHA) loan program operating.

The FHA is not a mortgage lender; instead, it’s an insurance provider for lenders. When you get an FHA loan, your lender provides the money. The FHA insures the loan.

So if you stopped making payments and the lender had to foreclose, the FHA would step in to help cover the lender’s losses.

With this insurance coverage in force, the lender can approve loans even when the borrower has average credit, a low down payment, and a debt-to-income ratio up to 50 percent.

But it’s the borrower who pays the mortgage insurance premiums (MIP).

Check your eligibility. Start here (Sep 16th, 2024)

How much does mortgage insurance cost?

Modern FHA mortgage loans charge two types of mortgage insurance premiums:

• Upfront MIP: This coverage adds 1.75 percent of the loan amount upfront. For a $250,000 loan, 1.75 percent equals $4,375 to be paid as part of closing costs or rolled into the loan amount.
• Annual MIP: Most borrowers pay 0.85 percent of their loan balance each year in annual MIP. For a $250,000 loan balance, 0.85 percent equals $2,125, which would be broken down to 12 monthly payments of about $177 each.

The FHA charges a different annual insurance rate for some loans, and we’ll explore those details more below. Most borrowers pay the 0.85 percent annual rate.

Paying these premiums can be a good deal: They can save more in interest than they cost in monthly fees. Still, many borrowers want to get rid of this added cost.

How do I cancel my FHA mortgage insurance premium (MIP)?

The Federal Housing Administration changes its mortgage premium costs and policies from time to time. So how, and whether, you can cancel your FHA MIP will depend a lot on the age of your loan.

The last major change in FHA MIP policies went into effect on June 3, 2013. This means loans that were closed prior to June 3, 2013, have different policies.

For FHA loans opened before June 3, 2013

If you closed your FHA loan prior to June 3, 2013, you can cancel your loan’s annual MIP payments if:

1. The mortgage loan is in good standing
2. Your loan balance is at or below 78% of the last FHA-appraised value, usually the original purchase price.

If you haven’t quite reached the 78% loan-to-value ratio (LTV), keep making regular payments and checking with your loan servicer.

Borrowers who have already hit the magical 78% LTV can potentially start saving hundreds on their monthly payments and keep their existing FHA loan and interest rate intact.

Check your eligibility. Start here (Sep 16th, 2024)

For FHA loans opened on or after June 3, 2013

Most home buyers with newer FHA loans will have a harder time canceling their annual MIP payments. That’s because the FHA made annual MIP permanent for many borrowers starting in 2013.

Unless you put at least 10 percent down on your home — much higher than the 3.5 percent minimum down payment required for most borrowers — you’re stuck with annual MIP payments until you pay off the loan.

If you put 10 percent or more down, your MIP will go away after you’ve made payments on your loan for 11 years.

If you put less than 10 percent down, you’ll likely need a mortgage refinance to eliminate these monthly premiums.

See if you can cancel your FHA mortgage insurance. Start here (Sep 16th, 2024)

Refinancing out of FHA MIP

If you’ve built up a fair amount of equity in your home, refinancing out of the FHA loan program can eliminate FHA mortgage insurance premiums.

Most homeowners with FHA loans refinance into a conventional loan. Conventional loans do not have insurance from the federal government so borrowers will need stronger credit scores and enough home equity to qualify.

Most conventional lenders require 20 percent home equity for refinance loans. That means your current loan balance can’t exceed 80 percent of your property value. For a home with a value of $300,000, you’d need to pay your loan balance down to $240,000 or lower to refinance.

Rising home values also help you build equity more quickly and since prices have been going up, many homeowners will reach 20% equity faster than they would through regular loan payments alone.

Keep in mind that rising home values also help you build equity more quickly. And since prices have been going up across the nation, many homeowners will reach 20% equity faster than they would through regular loan payments alone. If you think you have enough equity to refinance out of MIP due to rising home values, your lender can check via an appraisal during the refi process.

Refinancing won’t always save money, even if you get rid of FHA MIP. If your new refinance rate exceeds your current rate, for example, you will likely pay more in interest on your new loan than you’re paying in MIP right now.

Be sure you get at least three loan offers to find the lowest possible rate. It’s also important to know that conventional loans require mortgage insurance, too — if you refinance with less than 20 percent equity.

Check your eligibility. Start here (Sep 16th, 2024)

Conventional PMI vs FHA mortgage insurance

Conventional mortgage loans do not require government mortgage insurance premiums (MIP), but they do require private mortgage insurance, or PMI.

Unless you put 20 percent down — or refinance with at least 20 percent in home equity — your conventional lender will likely require PMI.

PMI will add extra money to your monthly mortgage payment just like the FHA’s annual MIP. PMI may even exceed FHA MIP rates depending on your credit score, debt load, and home equity.

But, unlike with the FHA’s current MIP policies, it’s possible to cancel a conventional mortgage’s PMI.

Once your loan balance falls to 80 percent of the current value of your home, you can request PMI cancellation. PMI should cancel automatically when your loan reaches 78 percent LTV.

Check your eligibility. Start here (Sep 16th, 2024)

Can you get rid of PMI on an FHA loan without refinancing?

Refinancing requires closing costs which could add 5 percent or more to the cost of your new loan. And, with mortgage rates increasing, refinancing could cost even more if you can’t match or beat your current home loan’s rate.

Some FHA loan holders can get rid of their mortgage insurance premiums without refinancing. If you:

• Put 10 percent or more down: Your annual MIP will go away on its own after you’ve made payments for 11 years.
• Closed your loan before June 3, 2013: Your annual MIP will go away once you’ve paid your loan down to 78 percent of your home’s value. If your FHA-appraised value is $250,000 and your loan balance is $195,000, you can stop paying MIP.

But if you put less than 10 percent down on a loan closed on or after June 3, 2013, your MIP will remain for the life of the loan. You’d need a mortgage refinance — or to pay off the loan completely — to stop paying MIP.

Check your eligibility. Start here (Sep 16th, 2024)

Tips to lower your FHA mortgage insurance rate

When you’re shopping for a mortgage, the FHA loan program’s mortgage insurance premiums may seem like a big downside — especially since annual MIP often lasts for the life of the loan.

But not all borrowers pay the full 0.85 percent annual MIP rate for the life of the loan. By shortening your loan term to 15 years or making a larger down payment, you can reduce your annual MIP rate and term.

For example, if you:

• Get a 15-year loan instead of a 30-year loan: Your annual MIP rate would be 0.70 percent for the life of the loan
• Put 5 percent down on a 30-year loan: Your annual MIP rate would go down to 0.8 percent for the life of the loan
• Put 10 percent or more down on a 30-year loan: You’d pay an annual MIP of 0.8 percent for 11 years
• Put 10 percent or more down on a 15-year loan: You’d pay a 0.45 percent annual MIP rate for 11 years

If you borrow more than $625,500, you’ll see higher annual MIP rates. They could go as high as 1.05 percent of your loan balance.

Check your eligibility. Start here (Sep 16th, 2024)

Is FHA MIP more expensive than PMI?

When you can pay 20 percent down on your mortgage loan, the MIP vs PMI question is easy: You’ll save with a conventional loan that requires no PMI payments when you put 20 percent down.

If you’re making a smaller down payment, the question is more complicated. For some borrowers, the FHA’s mortgage insurance premium (MIP) costs less than the private mortgage insurance (PMI) on a conventional loan.

Unlike FHA MIP rates which are set based on your down payment size and loan term, private mortgage insurance rates vary by lender and borrower. Annual PMI rates tend to range from 0.5 to 1.5 percent of the loan amount.

A borrower who barely qualifies for a conventional loan — which often means a credit score around 620 and a down payment of at least 3 percent — may save more money with an FHA loan, despite the loan’s 1.75 percent upfront mortgage insurance premium.

Every borrower is different. To see your actual costs, you’ll need to compare Loan Estimates from a variety of lenders.

Check your eligibility. Start here (Sep 16th, 2024)

Four ways to get rid of PMI

The biggest benefit of paying PMI on a conventional loan instead of MIP on an FHA loan is the PMI cancellation policies.

The Homeowners Protection Act of 1998 helps ensure borrowers won’t pay PMI indefinitely.

To get rid of PMI on a conventional loan you can:

• Make payments until PMI is canceled: When you have a conventional loan, getting rid of PMI is just a matter of waiting. Your lender will cancel PMI once you’ve paid down your original loan balance down to 78 percent of the value of your home
• Ask for cancellation when you achieve 20 percent equity: You don’t have to wait until you’ve reached 78 percent LTV. When you reach 80 percent LTV — or 20 percent equity — you’re eligible for PMI cancellation. You just have to ask your loan servicer
• Get a new valuation: The value of your home is defined by a home appraisal. If you think your home value has increased a lot recently, a new appraisal may show you already have 20 percent equity — enough to cancel PMI. If you don’t request a new valuation, your lender will likely calculate your equity based on your original value
• Refinance if equity has increased: Different conventional loan programs backed by Freddie Mac and Fannie Mae have different PMI requirements. You could refinance into a program that doesn’t require PMI for your home

There’s another way to eliminate PMI, but it works only for active-duty military members, military veterans, and some surviving spouses of veterans who were killed in the line of duty.

A VA cash-out refinance — which is available only for members of the military community — can help you refinance from a conventional loan into a VA loan and will not require any annual mortgage insurance. The loan does require an upfront funding fee, however. If you ever served in the military and were honorably discharged, you likely have VA loan eligibility.

FHA mortgage insurance premium FAQs

When can you drop PMI on an FHA loan?

FHA loans do not charge PMI. Instead, they require MIP, the FHA’s own brand of mortgage insurance premiums. Modern FHA loans require MIP for the entire life of the loan unless you put 10 percent or more down. In that case they go away after 11 years. For FHA loans closed before June 3, 2013, MIP expires after the loan balance reaches 78 percent of the home’s value.

What is FHA MIP?

FHA MIP is the Federal Housing Administration’s specific type of mortgage insurance. The FHA charges two types of MIP: An upfront fee that equals 1.75 percent of your loan amount and an annual fee that equals 0.85 percent of the loan amount for 30-year loans with 3.5 percent down.

Does FHA require PMI without 20 percent down?

FHA loans always require MIP. If you put 20 percent down, you’d still pay upfront MIP and annual MIP for at least 11 years. If you put 20 percent down on a conventional loan you shouldn’t need to pay any PMI.

Can PMI be removed from an FHA loan?

MIP can be removed from some FHA loans. If you put 10 percent or more down, MIP will expire after 11 years. If you closed your FHA loan before June 3, 2013, your MIP will expire once your loan amount falls to 78 percent of your home’s FHA-appraised value.

Can I cancel PMI after 1 year?

Most conventional lenders require PMI until the loan’s principal balance falls to 80 percent of the home’s value. If you can reach this threshold in one year, then you can cancel PMI after a year. This isn’t true with FHA loans which require MIP throughout the loan term for most borrowers.

How soon after closing can you remove PMI?

PMI on a conventional loan does not have a set expiration date. Instead, it’s required until you pay the mortgage balance down to 80 percent of the home’s value. You can reach this threshold sooner by making extra payments. An FHA loan’s MIP, which resembles conventional PMI, lasts until you pay off the home — unless you put down 10 percent or more in which case MIP expires after 11 years.

Do any lenders specialize in FHA-to-conventional refinances?

Almost all lenders offer FHA-to-conventional refinances. Conventional loans are the most common loan type for residential real estate.

Can you take cash out when removing mortgage insurance?

It is possible to take cash out when refinancing to remove mortgage insurance. Cash out eligibility depends a lot on your home equity. You’d need to leave 20 percent of your equity in the home. To get 20 percent cash out, you’d need to have 40 percent in equity.

How can I get rid of PMI without 20 percent down?

Typical conventional loans require PMI unless you put 20 percent down. However, a few lenders will waive PMI in exchange for a higher interest rate. This approach may cost even more than paying PMI unless you refinance out of the higher rate.

How is mortgage insurance (MIP) calculated by FHA?

All FHA loans require 1.75 percent of the loan amount as upfront MIP. Annual MIP can vary from 0.45 percent to 1.05 percent depending on your loan amount, loan term, and down payment amount. If you get a 30-year loan and make the FHA’s minimum down payment of 3.5 percent, your annual MIP would add 0.85 percent of the loan amount per year.

Does FHA mortgage insurance go down every year?

If your loan balance goes down — as it should — every year, your FHA MIP will go down, too. This happens because MIP is charged as a percentage of your loan balance. You’ll pay a premium based on your original loan amount only in the first year.

Does FHA mortgage insurance ever increase?

The FHA changes its MIP rates from time to time. But these changes apply only to new FHA loans. Existing FHA loans keep their existing MIP rates and policies.

Is paying PMI or MIP worth it?

Yes. To avoid MIP or PMI, you’d need to save up a 20 percent down payment. Meanwhile, as you save money, house prices may be increasing. PMI and MIP allow you to buy sooner by lowering your down payment target.

Making a plan to get rid of FHA mortgage insurance is a great financial decision

When you’re buying a home, you’re mainly focused on getting into a place where you can set down roots and build a solid future. The down payment can be a big hurdle so high FHA PMI costs can be a worthwhile trade-off.

But now that you’re settled in, you might want to get rid of those FHA mortgage insurance premiums so you can put that money into savings, your child’s college fund, or toward high interest credit card debt.
Even if you can’t cancel your mortgage insurance now, you can make a plan for how you’re going to do it.

Check today's rates and start your MIP-eliminating refinance here (Sep 16th, 2024)

The post How to Get Rid of PMI on an FHA Loan | No Refinancing 2024 first appeared on My Mortgage Insider.

A cash out refinance or HELOC (home equity line of credit) lets homeowners turn some of their “equity” into cash. But when you’re choosing between them, you’ll need to consider the specifics of your personal finances to determine which type of loan is right for you.

Check your cash-out refinance interest rates. Start here (Sep 16th, 2024)

What’s the difference between a second mortgage and a refinance?

HELOCs, home equity loans and cash out refinances all let you get your hands on cash that’s currently tied up in your home.

HELOCs and home equity loans are second mortgages. In other words, you borrow and repay them in parallel with your original mortgage. And that means two monthly mortgage payments.

However, a refinance involves swapping your current mortgage for a completely new one.

Read on to discover the detailed differences in costs and characteristics that can make any of them the best in different circumstances.

Different options for tapping home equity

What is a cash out refinance?

You get a whole new mortgage. But you borrow more than you’d need just to replace your existing one and you receive a check for the difference.

What is a HELOC?

It’s a second mortgage that complements — rather than replaces — your first mortgage. You get a line of credit, similar to the one you get with a credit card. So you can borrow, repay, and borrow again up to your credit limit. And you pay interest only on your outstanding balance.

What is a home equity loan?

This, too, is a second mortgage. But, instead of getting a line of credit, you receive a lump sum, which you pay down in equal installments.

Check your cash-out refinance interest rates. Start here (Sep 16th, 2024)

What’s the difference between a HELOC and a home equity loan (HEL)?

We just covered the main differences. But there are others:

1. HELOCs usually have variable interest rates while HELs usually have fixed ones. So you run the risk of rising rates with a HELOC.
2. HELOCs tend to have lower interest rates than HELs. But your personal creditworthiness and financial health may influence your rates even more.
3. HELs are straightforward installment loans. You pay them down in equal installments.
4. HELOCs come in two phases. The draw period is when you can borrow, repay, and reborrow. But then comes the repayment period, during which you can’t borrow anymore. You must pay it off little by little via monthly payments, or refinance it into another loan.

Home equity loan, HELOC or cash out refi: Which is best?

Which is best has as much to do with your needs as each mortgage loan’s characteristics. Pick the one that meets your requirements best, bearing in mind the following:

1. The mortgage rates. Typically, cash out refinances have the lowest rates, followed by HELOCs and then HELs.
2. The closing costs. This time, cash out finances are usually most costly, followed by HELs and then HELOCs. Run the numbers to see which combination of rates and costs suits you best.
3. How much you want to borrow. Mortgage lenders will normally borrow up to 80% of the equity you have in your home with all of these. But cash out refinances and HELs provide a lump sum while HELOCs let you draw down from a line of credit.
4. What you’ll do with the money. HELs and refinances are best for lump sums. But HELOCs are great for freelancers, contractors and others in the gig economy. You can borrow in lean months, repay in good months and borrow again when times turn hard again. HELOCs are also good for those who want large sums for a short time. You only pay interest on the outstanding balance.
5. How long you plan to stay in your home. The sooner you’ll be moving on, the more you’ll want to keep your closing costs lower. They’ll be wasted when you sell and get a new mortgage. So a HELOC, with its low or zero closing costs, may be better in those circumstances.
6. Your risk tolerance for rising interest rates. Rates have been low and generally falling for more than a decade but that’s no guarantee they’ll stay that way. If you opt for a HELOC, which usually has a variable rate, you’ll be on the hook if they rise. HELOCs are usually based on the prime rate, currently 3.25%. Great borrowers get prime + 0%. Prime rate has been as high as 5.5% in recent years, and much higher in the past. Make sure you can still afford a rate that goes up 2-3% in coming years.

Of course, we’re talking generalities here. For example, you can find HELs with variable rates. And you could choose an adjustable-rate mortgage (ARM) for your cash out refinance.

Check your cash-out refinance interest rates. Start here (Sep 16th, 2024)

Pros and cons of a cash out refinance

Pros of a cash out refinance

Why might you choose a cash out refinance rather than a HELOC or HEL? Well, there are several possible reasons:

1. Lower mortgage rates. These refinances typically have lower interest rates than home equity loans, but not always than HELOCs.
2. More flexibility. You can choose the type of mortgage that suits you: conventional, FHA, VA, jumbo. But you can’t do a cash out refinance on a USDA loan.
3. Lower monthly payments. You can spread payments over 30 years, which is a longer loan term than most home equity loans or lines of credit. The more payments, the lower each needs to be. Home equity loans — but not HELOCs — can also last 30 years but they’re usually for a shorter period of time.

Those are compelling advantages for many borrowers. But here are the drawbacks.

Cons of a cash out refinance

Cash out refinancings have some disadvantages you should take seriously:

1. You’re resetting the clock on your mortgage balance. Suppose you’ve had your existing 30-year mortgage for 10 years. Get a 30-year cash out refinance and you’ll be paying down your home for 40 years: the 10 you’ve already done and the 30 on the new loan. If you can afford the payments, opt for a 15- or 20-year term.
2. You may pay more in the end. Even with a lower interest rate, borrowing (and paying interest) for so long is expensive. Your total cost of borrowing will likely be lower with a shorter home equity product. Unless, that is, you can afford the higher payments that come with a 10-year, 15-year or 20-year cash out refinance.
3. Closing costs are higher than for home equity products. If you plan to move in the next few years, those higher costs could make a cash out refinance too expensive.
4. Your new loan could have a higher rate than your existing one. That’s less likely at a time when rates are falling. But cash out refinances often have slightly higher rates than straight refinances when your only benefits are a lower rate and a smaller monthly payment.
5. You might have to pay mortgage insurance. This is rare because most lenders require you to keep a 20% equity cushion that lets you avoid those premiums. But if you find one that lets you borrow more than 80% of you home’s value, you will have to pay mortgage insurance.

Cash out refinances remain a very popular way to get cash from the value of your home.

Check your cash-out refinance interest rates. Start here (Sep 16th, 2024)

Pros and cons of home equity lines of credit (HELOCs)

Although HELOCs and cash out refinances both let you access money that’s tied up in your home, they’re typically used for very different purposes. So let’s look at the tradeoffs:

Pros of home equity lines of credit (HELOCs)

For the right borrower, HELOCs have some impressive advantages:

1. Typically lower closing costs than a cash out refinance or home equity loan. Sometimes those costs are zero. The lower upfront costs could make a HELOC a good option, even if you intend moving in a year or two.
2. May be eligible for tax deductions on your interest payments. But only if you use the money for certain types of home improvements.
3. Low rates. Typically appreciably lower than for a HEL. Sometimes these rival cash out refinance rates.
4. Borrow large amounts. This depends on the amount of equity but you’re likely able to borrow much more than with a credit card or personal loan.
5. Flexibility. Borrow, repay and borrow again at will up to your credit limit. And only pay interest on your balances. Great for those with constantly changing incomes. And for those who want to borrow big sums for short periods.

Cons of home equity lines of credit (HELOCs)

So what should you be wary of? Here are some potential drawbacks:

1. Higher interest rates. Not all HELOC rates can compete with refinance ones.
2. Shorter terms. HELOCs often come with terms of five to 10 years. And shorter terms mean higher monthly payments, compared with cash out refinances and some HELs.
3. Two mortgage payments. This applies to HELOCs and HELs which are both are in addition to your primary mortgage. A second mortgage means a second monthly payment.
4. Variable interest rates. After more than a decade of downward trending rates, we sometimes think interest rates can move only one way. But that’s not true. And current economic uncertainty could eventually lead to higher rates. If that happens when you have a HELOC, your loan could become high-interest debt and you’ll have to pay more and make higher monthly payments.
5. Repayment periods. After a set number of years, your draw period will end and your repayment one begins. Some borrowers experience difficulties at that point. They can’t borrow anymore and they have a fixed time within which to pay down their balance. Unless they can refinance the loan amount.

In the end, the choice between a cash out refinance and a HELOC depends on the specifics of your financial circumstances.

Check your cash-out refinance interest rates. Start here (Sep 16th, 2024)

The post Cash Out Refinance vs HELOC: What’s the difference? first appeared on My Mortgage Insider.