FHA Mortgage Refinancing Takes a Bite Out of Your Pocket

FHA mortgage refinancing is about to get much more expensive. For the fourth time in three years, the FHA is raising mortgage insurance premiums to offset their anticipated losses. The increase applies to all purchase and mortgage refinance loans. In fact, many lenders like Amerisave and USAA Mortgage Rates are saying it’s cheaper to refinance with a conventional home loan and avoid the FHA. If you’re considering mortgage refinancing with an FHA backed home loan, here are several things to consider so you’re not leaving cash on the table.

FHA Home Loans Require Mortgage Insurance

FHA home loans are great for homeowners that might not otherwise qualify because of poor credit. The FHA doesn’t lend the cash for your home loan; they simply insure lenders against certain losses if you default. Like any insurance this guarantee costs money which you’ll pay upfront and every year that you keep the loan. The problem lately is the FHA claims the premiums they’re collecting are not enough to offset what they’re paying out to lenders to cover losses. (Hence all the mortgage insurance premium hikes.)

This will be the fourth increase in three years which means if you take out an FHA home loan your payments will be higher than if you had taken out a conventional loan, even if you’re required to pay for private mortgage insurance.

FHA Mortgage Refinancing Advantages

FHA mortgage refinancing appeals to many homeowners because these home loans have less strict credit requirements to qualify. As for the up-front mortgage insurance, you won’t be required to hand over the cash at closing because the amount is simply tacked onto your loan balance. If you have an existing FHA home loan you could qualify for a streamline refinance, allowing you to take advantage of today’s low refinance mortgage rates without a credit check, documenting income or verifying employment. This is a huge advantage for the recently unemployed and a good reason to stay with the FHA if you’ve already got one.

Conventional Refinancing Could Save You Money

If you have a conventional home loan it may be cheaper to avoid FHA mortgage refinancing. If you’re a veteran you should take advantage of VA mortgage loans because they don’t require mortgage insurance and offer a streamline refinance option called an Interest Rate Reduction Refinancing Loan (IRRRL). The problem with conventional mortgage refinancing is that many homeowners overpay discount points and fees, negating any benefit they’re getting from mortgage refinancing.

Beware Unnecessary Discount Points & Fees

The reason fees are so important, more important than just getting the lowest refinance rates, is that if you’re not able to break even recouping your out-of-pocket expenses you’re going to be losing money. One of the most common mortgage mistakes is focusing solely on getting the lowest interest rates at all cost, including overpaying discount points. Refinance rates are hovering near sixty-year lows and any fees you’re paying to buy down already low rates are just inflating your closing costs unnecessarily.

Another commonly overpaid cost is the origination fee. This is paid to the broker or company arranging your refi and simply should not be more than one percent of your home loan amount. Lender Junk fees you’re likely to encounter include application, courier and processing fees. These can usually be negotiated down or simply find another lender that isn’t going to charge you junk fees.

How to Approximate Your Break Even Point

You can answer the question ”should I refinance my mortgage” by approximating your break-even point. This is helpful if you’re keeping the same term-length (15-year to 15-year or 30-year to 30-year) to decide how long it’s going to take you to recoup your out-of-pocket expenses. If you sell or refinance again before breaking even you’re going to be losing money. Note this doesn’t work well if you’re lengthening your term, like going form a 15-year to a 30-year home loan.

You can approximate your break-even point by adding up your total closing costs and diving by the amount your monthly payment will be going down. This tells you the number of months it’s going to take to recoup your closing costs. If the amount of time is acceptable to you it probably makes sense to go forward with mortgage refinancing.