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Many homeowners cannot refinance their mortgages due to fallen home values and lost home equity. With mortgage rates at or near record lows, refinancing may be possible with an FHA refinance mortgage.

Can't Refinance Due to Low Home Equity? Refinance Your Conventional Mortgage to an FHA Home Loan

Through no fault of their own, homeowners are finding it impossible to refinance their conventional mortgages. Don't give up; low mortgage rates provide more borrowing power and can help you pay off your mortgage faster while lowering your monthly payments. Uncertain economic conditions can impact your household at any time, so reducing debt and lowering payments is a step toward maintaining financial security. Unlike choosing to walk away from a mortgage you can't refinance, refinancing a conventional mortgage to an FHA loan allows you to stay in your home while gaining the benefits of an affordable mortgage refinance. You can refinance up to 96.5 percent of your home's current value with an FHA loan; FHA doesn't limit combined LTV (CLTV) if you have a home equity loan, but your home equity lender would have to subordinate its interest to your FHA refinance.

FHA Loans: Understanding Mortgage Insurance

Any mortgage exceeding 80% of your home's current appraised value requires mortgage insurance. FHA splits the cost of its mortgage insurance into two segments. The up-front mortgage insurance premium (UFMIP) is calculated at 2.25% of your refinance amount (not including closing costs rolled into the refinance mortgage). The annual portion of the FHA mortgage insurance premiums is calculated at .55% of the mortgage amount and is pro-rated monthly and added to the monthly payments. For a mortgage of $200,000, you would pay a UFMIP of $4500, and an annual premium of $1100. The monthly amount added to your new mortgage payment would be about $96.67. The FHA is seeking approval to re-distribute some of the UFMIP to the annual portion of the mortgage insurance payment to reduce up front costs, but approval is pending as of this writing.

Lower Mortgage Rates Offer Long Term Savings

Using free mortgage calculators for estimating savings and comparing refinancing scenarios can help with evaluating FHA mortgage quotes and the potential benefits of refinancing. FHA lenders can provide refinance mortgage quotes and answer questions.

Karen Lawson
Karen Lawson is a freelance writer with extensive experience in mortgage banking and home loan loss mitigation programs. She holds BA and MA degrees in English from the University of Nevada, Reno.