It makes sense to refinance your FHA loan with a conventional loan if you want to stop paying for mortgage insurance premium, or MIP. MIP is the annual and monthly fees you pay for when opting to put a low down payment. Homeowners who put a 3.5 percent down payment on their FHA loan expect to pay MIP until they finish repaying the loan.
In a recent CNBC article, Mortgage Bankers Association economist, Joel Kan noted an increase in conventional and government loan refinances because of the current interest rates which continue to be favorable.
FHA loans could be your gateway to homeownership as it allows you to take out a mortgage even if you have a low credit score and if you’re putting a low down payment. However, after years of staying current with your monthly payments, you may want to refinance out of your FHA loan if your home equity reaches more than 20 percent. Refinancing your FHA loan with a conventional loan is one of the few ways you can get rid of your MIP.
If you were able to take out an FHA loan to buy your home, you’re probably familiar with the following steps taken to refinance your mortgage:
- Shop for a mortgage lender – Check and compare interest rates from mortgage companies including the associated fees you need to pay when you refinance your mortgage. Shopping for a mortgage lender lets you find out if there are lenders who could offer you competitive refinancing rates compared to your current one.
- Submit your refinance applications to several lenders – Some homeowners find it ideal to submit applications to a maximum of five lenders within two weeks, so it won’t greatly affect their credit scores. Your proof of income, credit report, outstanding debt statements that you may have are some of the basic documents that you need to prepare when applying to refinance.
- Lock in your rate with a lender – After comparing several Loan Estimates, you need to secure a rate lock from the mortgage lender you chose so that the interest rate, fees, and the points will remain the same if you are able to close within the specified timeframe. Even if you opt for a rate lock, there could be instances that the initial loan estimate you receive could change, especially if the lender later determines that your property has a low appraisal value or you did something that negatively impacted your credit score (like buying a new car).
- Close on the loan – Like homebuying, this is the final step when you refinance out of your FHA loan. Make sure to read and understand all the terms and conditions in the fine print before signing the documents. This is also the time that you pay all the necessary upfront payments when you refinance your mortgage. If upon closing, you think that you’re not happy or you believe that you’re being tricked with the terms, you should know that you have the right to rescind when you refinance your mortgage. You have until midnight of the third business day after the transaction within which to cancel your mortgage contract.
An AEM loan advisor can help you achieve your financial goals
Refinancing out of your FHA loan is a viable option if you can get a competitive interest rate and if you also want to eliminate your MIP, refinance with a conventional loan, eventually helping you increase your savings. If you’re considering refinancing soon, a professional American Eagle Mortgage loan advisor could help you achieve your financial goals as a homeowner.