Refinance to an FHA Mortgage? Compare the Costs

by Gina Pogol
February 5th, 2010

You don’t need to have an FHA mortgage to refinance with FHA. And the fact that you only need 3.5% home equity is a compelling reason to consider this refinancing option. For those with conventional loans, FHA refinancing may be better than paying Fannie and Freddie’s risk-based pricing adjustments. But FHA also has its costs (and they’re going up soon).

FHA, Traditional, or HARP Refinance?

The refinancing choice best for you depends on your credit rating and the amount of equity you have. Regardless of your equity, FHA requires a mortgage insurance premium (MIP). There is also a monthly charge for most loans. If you have at least 20% equity and excellent credit, a conventional refinance is your least costly alternative. And if you don’t have at least 3.5% equity and your current mortgage is owned / serviced by Fannie or Freddie, than the HARP is your only choice. It’s those who fall between these extremes who have to carefully evaluate before choosing a refinance option.

HARP Highlights

If you originally bought your home with at least 20% down, and now you have less than 20% home equity due to decreasing home values, a HARP is worth a look. If you didn’t need mortgage insurance on your original mortgage, you don’t need it on your HARP loan, even if your mortgage balance exceeds your property’s value. If you have low-to-middling credit scores, a high loan-to-value ratio, and / or other monkey wrenches like a manufactured home or condo, HARP may be better than traditional financing — there is a 2% cap on fees, while normal refinances can have much higher surcharges depending on the strength of your application.

HARP Doesn’t Always Sound Good

HARP has its drawbacks — borrowers have reported that lenders take a very long time to process them and interest rates can rise while you’re waiting. In many cases you are stuck with your original lender and while it has you captive it doesn’t necessarily offer you the best rate. And often mortgage insurance is very difficult to come by.

FHA Advantages

If you have at least 3.5% equity in your home, FHA’s refinance might be a better deal. First, its credit underwriting standards are less rigorous than Fannie Mae’s and Freddie Mac’s. Second, even though there is an MIP required, you are allowed to finance it, and that amount isn’t included in your loan to value calculation. Third, you can shop for your loan and choose the most competitive provider.

Here’s an Example

Supposing you originally bought your $300,000 condo by putting 10% down, and your property value dropped to $285,000, so that you now have 5% equity. Your current interest rate is 6.25% and your credit score is 659. What’s better, HARP, FHA, or a Fannie Mae refi? Let’s have a look.

FHA Costs

On a $270,000 FHA mortgage, your costs are:

Upfront MIP 1.75% (increases to 2.25% in late spring / early summer 2010) $4,725
Monthly MIP of .5% or $113 a month
Assuming 2% normal closing costs and a 5% interest rate, your APR is 5.72%

HARP Costs

Same $270,000 mortgage, costs are:

Loan Level Pricing Adjustments (LLPA) 2% $5,400
Monthly Mortgage Insurance at .94% (higher if you live in a soft real estate market) = $212 per month
Assuming 2% normal closing costs and a 5% interest rate, your APR is 6.08%.

Regular Fannie Mae Refi

Loan Level Pricing Adjustments as follows:
Adverse market delivery charge: .250%
Credit score: 1.75%
Condo: .75%
Total: 2.75% or $7,425
Monthly Mortgage Insurance at .94% (higher if you live in a soft real estate market) = $212 per month
Assuming 2% normal closing costs and a 5% interest rate, your APR is 6.15%.

So when looking at refinancing, consider FHA, even if your current mortgage is not an FHA loan. Try several lenders and compare their Good Faith Estimates for fees and APRs. And do it quickly, before FHA increases those insurance premiums.

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This entry was posted on Friday, February 5th, 2010 at 12:49 pm and is filed under . You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.

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