Home loans supported by the Federal Housing Administration — otherwise known as FHA mortgages — have many advantages for new homeowners or those who are repairing their credit. Because these loans are backed by the federal government, approved lenders who make FHA mortgages usually extend more favorable terms such as lower credit score and down payment requirements.
If your credit has improved, you earn more income or overall interest rates have declined since you first took out the loan, you may be interested in refinancing your FHA mortgage. Doing so can reduce the monthly mortgage payment and the interest rate or the term, potentially generating savings for you over the long term.
Want to learn more refinancing an FHA loan? While you can refinance your mortgage and keep it with the FHA, the other option is to convert it to a conventional home loan. This route has one big upside: the chance to get rid of private mortgage insurance.
FHA loan to conventional mortgage
Refinancing from an FHA loan to a conventional loan entails switching to a traditional mortgage offered by a financial institution and not supported by the government. Often, homebuyers choose an FHA mortgage because the qualification standards are eased, but as they grow personally and professionally, they may discover a conventional loan is better suited for their financial goals and needs.
Refinancing out of an FHA loan and into a conventional mortgage would rid borrowers of mortgage insurance premiums, or at least allow them to reduce such payments. All FHA mortgages come with the inclusion of mortgage insurance, which goes toward protecting the lender against defaults. Mortgage insurance usually lasts the whole term of an FHA loan, but opting to refinance with a conventional loan can eliminate mortgage insurance altogether, or significantly reduce the premiums you pay.
Another way to obtain more favorable terms is in the interest rate. You may be able to convert from a fixed-rate loan to an adjustable-rate mortgage, while also benefiting from generally lower interest rates. All these cost-savings and increased flexibility can help you find a mortgage that fits your evolving personal needs.
One financial consideration to keep in mind, however, is closing costs. Be sure to budget them into your decision-making, as closing costs can reach up to 3% of the loan value for conventional mortgages. You don't want a surprise at the end of the process to derail your refinancing objectives.
Have questions about your mortgage? Talk to the experts at Comerica Bank for more information on what benefits are possible and what options you have.
