November 12, 2020
There are good reasons to refinance your mortgage, and there are reasons that aren’t advisable. What do you want to accomplish with your refinance loan? Borrowers looking for cash out might list that as the primary reason but what you plan to do with that cash could be just as important as the home loan itself.
There are many reasons to consider refinancing your home loan with an FHA refi loan. One is to get into a lower interest rate–whether you have an existing FHA mortgage or a non-FHA loan, you can refinance into an FHA loan with the goal of getting a lower rate.
It’s a very good idea to let your participating FHA lender know the specific reason you want to apply for refinancing.
If getting a lower rate is your goal, you can discuss your refi options including refinancing an existing FHA loan into a Streamline Refinance which generally must result in a lower rate, a lower payment, or a different benefit (getting out of an adjustable-rate mortgage is one of them).
If you are refinancing a non-FHA mortgage and want a lower rate, you can consider using an FHA simple refinance, an FHA rate-and-term refinance, and the option to refinance into a 15-year loan term may also provide a form of a lower rate.
Remember that the interest rate offered to you depends in part on your FICO scores and credit history so ask your loan officer what you need to do if your credit scores need some improvement to get a lower rate.
If you are considering a cash-out refinance loan, be aware that you can refinance both FHA and non-FHA mortgages. There are many good reasons to apply for a cash-out refinance, but if your goal is to pay off credit card debt you may wish to reconsider–some studies indicate that paying off revolving credit using a cash-out refinance carries a specific kind of risk.
Namely that the borrower will run up their revolving debt over time in the wake of the cash-out loan and could end up in the same exact financial position again later.
The borrower who wants to use cash-out loan funds to do home improvement projects may or may not find doing financially sound compared to applying for a different kind of FHA loan for the same purpose–the FHA Rehabilitation Refinance Loan also known as an FHA 203(k) which can be used to refinance and improve a home at the same time.
FHA 203(k) rehab loans do restrict the use of the cash provided from that loan to approved projects in the home where FHA Cash-Out Refinancing does not restrict the use of the funds. But you may find that one loan or the other is better for your purposes depending on the nature of your home improvements.
Ask your loan officer what people typically do in such cases–the extra insight could be a huge help in your decision-making process.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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