If you have an FHA loan, you probably want to know when you can refinance it. Not every homeowner refinances their mortgage, but when interest rates fall, it becomes pretty tempting to grab that lower rate. Some homeowners also refinance when they have equity in their home and they need to tap into it.
Just how soon can you refinance your FHA loan? Keep reading to find out the rules.
The FHA Streamline Refinance
The FHA streamline refinance allows you to refinance your loan to get a lower rate or to better your term. It’s a rate/term refinance; it’s not a cash-out refinance. If you want to get a lower rate or change your term, you’ll need to wait until you’ve made at least six payments on the loan or a minimum of 210 days.
If you do refinance as soon as six months after getting your FHA loan, you’ll have to have timely payments for those six months. In other words, you can’t have any late mortgage payments in that time. If you have your FHA loan for 12 months before you refinance, the FHA does allow for one late payment within that time, but it can be a maximum of 30 days late. You must also be up-to-date on your payments when you apply for the refinance.
The FHA Cash-Out Refinance
Like the FHA streamline refinance, you must wait at least six months before you can refinance with the FHA cash-out refinance. While that requirement exists, it’s a bit different with the cash-out loan. FHA loans only allow a maximum LTV of 85%. Since most FHA borrowers put down the minimum 3.5% as a down payment, it will take a lot longer than 6 months to be able to tap into your home’s equity.
Like the FHA streamline loan, you must have timely mortgage payments for at least the last six to 12 months to get the FHA cash-out refinance. Because cash-out refinances are riskier than rate/term refinances, most lenders don’t grant an exception to have any late payments during that time.
The Conventional Loan Refinance
Many borrowers like to get an FHA loan for their purchase loan because of its flexible guidelines and low down payment requirements and then refinance into a conventional loan down the road. This gives borrowers the chance to purchase a home sooner while still having the option to refinance into a conventional loan in the future.
Conventional lenders typically like you to have at least six payments made on your mortgage before you can apply for a conventional loan refinance. In order to qualify for a conventional loan, you need:
- 680 credit score
- 28% housing ratio
- 36% total debt ratio
- Max 95% LTV for a rate/term refinance
- Max 80% LTV for a cash-out refinance
- On time mortgage payments
The main benefit of refinancing into a conventional loan is the lack of mortgage insurance. If you have at least 20% equity in the home, you won’t have to pay any mortgage insurance. If you have an LTV higher than 80%, you will pay PMI, but you can request cancellation once you owe less than 80% of the home’s value. This can happen according to the amortization schedule if you make your payments on time. It can also happen faster if you make extra payments towards your principal and/or the home appreciates.
FHA loans don’t allow cancellation of mortgage insurance. You pay it for the life of the loan, so it’s something to consider when you look at your options for refinancing your FHA loan into either another FHA loan or a conventional loan.
When Should you Refinance Your FHA Loan?
Another question you should ask yourself is when you should refinance your FHA loan. Just because you can refinance it after six months, does it make sense to do so?
Something to keep in mind is the cost of the refinance. Every loan costs money unless you negotiate a no-closing-cost loan. If you do that, though, the lender will charge you a higher interest rate, so the savings may not be as great.
Refinancing your loan after just six months gives you very little time to build up equity in the home. The only time it may make sense to refinance early like that is if interest rates drop significantly and you can use the FHA streamline program. Because the FHA streamline program doesn’t require verification of your income, assets, credit score, or home value, there are fewer costs involved and it’s easier to get approved.
A good tool to use to determine if it makes sense to refinance is the break-even point. You can figure it out using the following formula:
Total closing costs/Monthly savings = Months to break-even
Typically, 36 months to break-even is the maximum you should allow. This means that it will take you up to 3 years to recoup the closing costs that you paid and start reaping the savings of the new mortgage. Even if you use the cash-out refinance option, you want to know the break-even point to ensure that it makes sense to tap into your home’s equity.
If you truly need to refinance, many programs allow you to do so after six months, but generally waiting a little longer will yield the best results. Make sure that you explore all of your options including FHA loans and conventional loans so that you know which loan will work the best for you. In addition, try securing quotes from at least three lenders so that you can see which lender offers the best options for your loan.