Among government home loans to help people realize the American Dream, the Federal Housing Administration either provides directly or backs specific home loans through its FHA loan program.
The options are intended to make it easier for homebuyers who can’t independently get approved for a conventional home loan.
Like many other aspects of the home loan industry, the FHA protects the lender by literally being the financial backer if the home loan fails. This means the lender will still get paid, and the government assumes the loss on its side.
An FHA mortgage can be a very effective way for a homeowner to get into a home in the first place. However, over time the same homeowner may start to wonder if it can be changed.
The answer is “yes,” and the process is done through what is known as a refinancing. This can allow the homeowner to take advantage of changes in the mortgage market, such as lower interest rates, and even reshape the mortgage to improve the home or make changes.
What Exactly Happens
When a borrower refinances he is literally exchanging an old mortgage for a new one. That said, the refinancing doesn’t just swap out the loan; one can change the terms, increase the size of the loan, pay a different interest level or use the loan for different purposes.
It’s common for borrowers to refinance so they can pull out money from their equity to pay for a backyard pool or a home renovation. Equity is the money one has paid overtime with an existing mortgage, gaining ownership of the house as the mortgage balance goes down.
Keep in mind, however, if a refinance increases the overall balance of a loan, the approval process can be longer and involve more review.
People usually refinance to save money. This can be through a new loan with a lower interest rate as well as shortening the repayment period.
As seen over recent years, interest rates have dropped considerably. If someone had a mortgage years ago at 8 percent, it would make sense to refinance the balance to 4 percent, cutting the interest payment in half.
Interest is the cost one pays to have the loan, so the interest portion of a mortgage payment is pure profit for the lender and does nothing to repay the loan.
The other savings area realized is by reducing the number of years a home loan takes to pay back. If one has a typical 30-year loan, that’s 30 years of interest payments. If a borrower refinances and changes it to a 15 or 10-year mortgage, it can hundreds of thousands of dollars less in interest payments. The mortgage loan payment amount will go up, but it may be worth the trouble to pay off a home faster.
The FHA streamline refinancing program involves replacing the original FHA-insured loan with another FHA loan and better terms.
This option allows a borrower to still stay within the FHA realm and its easier approvals than trying to meet the requirements of traditional lenders in a refinancing.
Ideally, an FHA streamlined loan should improve the borrower’s situation by a lower cost of 5 percent per month to be worth the work. Alternatively, reducing risk by swapping out an adjustable rate to a fixed interest rate is worth it as well.