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FHA loans are one of the best options for young, first-time home buyers who have not had as much time to save for a large down payment or establish a high credit score.

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Do I Need an FHA Refinance?

Do I Need an FHA Refinance?

With the recent trend of low interest rates, you may have heard many homeowners talking about refinancing their mortgage. To refinance a home is to replace your current home mortgage with a new one. Borrowers can choose to refinance for several reasons, but it comes down to prioritizing different benefits. One homeowner may want the lowest possible monthly payment, while another might want the shortest possible term for their loan.

Reasons Why a Homeowner May Choose to Refinance 

1. HISTORICALLY LOW RATES

If you are someone who goes into your bank regularly, you are probably used to a banker asking if you are interested in refinancing, since interest rates are “historically low.” It may seem like the word “historic” is thrown around a lot, it has been true since 2019. Interest rates started to decline in 2019 and have fallen steadily through 2020. The average rate for a 30-year, fixed rate home loan has fallen from 4.94% in November 2018, to 3.33% at the start of April 2020. A point drop in your interest rate could translate to huge savings with each monthly payment, which is why refinancing in such times can be a good idea.

2. SHORTENING YOUR TERM

Many borrowers also choose to refinance their mortgage so that their loan term is shortened. This may work for borrowers who have some long-term debts and enough money coming in each month to pay the mortgage off sooner. Shortening your loan term will mean increasing your monthly payments, so you will want to make sure your finances are managed and that your income is reliable. For many borrowers, it can be worth the higher payments, since shorter-term mortgages usually have lower interest rates, and borrowers end up saving on interest payments because they are paying it for a shorter amount of time.

3. GOING FROM ARM TO FIXED RATE MORTGAGE

A common reason many borrowers refinance is to go from an adjustable-rate mortgage to a fixed rate loan, usually because they want the security of a set monthly payment. Such refinances make the most sense when interest rates are low, probably before the introductory period on the ARM ends.

4. CONSOLIDATING YOUR DEBT

Many borrowers may choose a cash-out refinance to take better control of debt. By consolidating different loans (such as credit card bills and auto loans) into a one mortgage, they can have a single, fixed monthly payment, which is much easier to manage. Mortgages have lower interest rates compared to all other personal loans, so piling all your debt into a mortgage makes financial sense. Additionally, if it is timed right and interest rates are low, borrowers can also take advantage of market conditions and lower their monthly payment.

Is Now the Right Time? 

It is impossible to say with certainty what the future holds and interest rates can change at any point, but they are expected to remain low till the end of 2020, if not longer. Capitalizing on the current market rates might be in your best interest and could lower your monthly payment significantly. However, refinances are at an all-time high and that means lenders are experiencing a huge number of applications, which could potentially make loans slower to process.

Refinancing also comes with closing costs, so for some mortgage holders, it might not be worth the time or money to deal with it. One rule of thumb for refinancing is that you should plan to live in your home long enough to break even. Do the math to see how long you need to reside in the home to recoup the cost of refinancing in the interest you save.

It is also important to keep in mind that during the Coronavirus pandemic, many lenders have increased their eligibility requirements for refinances, especially for government-sponsored programs like FHA loans, such as higher minimum credit scores more detailed proof of employment and income.

Ultimately, the future is uncertain, and interest rate projections can turn out wrong. However, if you have not had a mortgage review in the past couple of years, it is worth getting in touch with a loan officer to see if a refinance could save you some money in the long run.

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