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A new reason to look at refinancing

Posted by  on Feb 05, 2015
 

If you have an FHA mortgage, the government just gave you a powerful new reason to consider a refinance.

As of January 15, 2015, all new FHA mortgages with terms of more than 15 years will see a 50-basis-point reduction in their annual mortgage insurance premiums, typically from 1.35 percent to 0.85 percent. For some homeowners, that insurance premium reduction will have the same impact as if interest rates had suddenly dropped by 50 basis points, but there is a catch: it only applies to new loans. So, if you have an existing FHA mortgage, you will have to refinance to take advantage of the insurance premium reduction.

This premium reduction does not mean that it makes sense for everyone with an FHA loan to refinance, but it should be an incentive to take a fresh look at the possibility. As always, the advisability of refinancing comes down to the numbers. Here are some things you should include in the decision:

  1. Factor the premium reduction into your refinancing calculations. Normally, refinancing calculations hinge on a comparison of mortgage rates, but in this case you need to compare the total percentage you are paying, which includes both the mortgage rate and the insurance premium. This will allow you to account for the lower mortgage insurance premium on the new loan in calculating your savings.
  2. Find out if and when your insurance premium is scheduled to end. In some cases, FHA insurance premiums no longer have to be paid after a certain repayment threshold has been reached, or at a specified time in the repayment schedule. The cancellation terms for FHA insurance premiums have varied over time depending on when the mortgage was written, so you should look at your specific mortgage agreement to see if the FHA insurance premium ends at some point for your loan. If so, when doing your refinancing calculations be sure to include the insurance premium in the cost of the old mortgage only for as long a period as that premium would be in effect.
  3. 15 Yr. Fixed - Refinance Rates from Our Lenders in VA

    Lenders
    Rate
    APR
    Monthly Payment
    First Internet Bank of Indiana
    3.250%
    3.322%
    $1,406
    American United Mortgage Corporation
    2.875%
    2.946%
    $1,369
    LoanDepot, LLC
    3.125%
    3.383%
    $1,393
    Last Updates: 10/17/2017 See More Rates
     
  4. Account for all fees in your refinancing comparison. While the primary focus is on mortgage rates, be sure to include any closing costs in the cost of a new mortgage.
  5. Consider the alternative of a shorter mortgage. If you are several years into a 30-year mortgage, it might make more sense for you to refinance into a shorter loan. Shorter mortgages often have lower rates and insurance premiums, though the new FHA insurance premium reduction only applies to loans of greater than 15 years.
  6. Shop to find the best mortgage lenders. Remember, the FHA itself does not offer loans; it finances loans that are offered through approved private lenders. Those lenders will offer a variety of different loan terms, so be sure to compare mortgage rates and closing costs from different lenders to make sure you are getting a good deal.

If you have an FHA mortgage, you may qualify for the FHA's streamlined refinancing, which expedites the approval process. Again, refinancing always comes down to the numbers, but the 50 basis point reduction in FHA insurance premiums gives homeowners a good reason to start crunching those numbers.

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