This may or may not be the best time to refinance a home mortgage, but it is hard to know for sure without asking a number of important questions. It can be very tempting to jump right into a refinance when it seems like the rates are so much lower, but the truth is it may not always be the best decision (or even possible).
An FHA refinance is a good option when the borrower is facing foreclosure or default on the current mortgage or has an ARM that is raising the payments beyond affordability. It may also be a valid alternative for homeowners with an income that is below the average for the area or when mortgage payments are taking up around a third of the total monthly income.
In order to determine whether or not this is the best time to refinance a home, the following questions need to be answered.
Do I have good enough credit?
Just like most other types of credit, lenders are going to require a credit check before approving an FHA refinance. Since the FHA was created to help people get into a home and keep it, a poor credit score will not automatically disqualify the borrower. If he or she has a history of on-time payments and an overall pattern of good credit, it is still possible to get refinanced. However, it is much easier when was has a good score before going into the application process.
Do I have equity in my home?
Equity is usually a concern when the borrower is seeking cash-out refinancing. In this case, regulations have become very strict, and they must all be met, but homeowners can still consider applying for refinancing even with low equity. There are some loan programs and FHA loans that may still accept the application.
What are my financial goals?
Refinancing has a number of benefits. The homeowner needs to have clear goals and know what will be the most helpful and how to take advantage of them. For example, it is possible to refinance to a lower rate and save money every month, but it will extend the term of the loan. This may be a good option depending on the length of time the homeowner expects to remain in the house. On the other hand, the borrower may choose to have a higher rate in order to pay the loan off more quickly.
Is an FHA Streamline an option?
An FHA Streamline refinance is a quick, easy way to handle the necessary paperwork to get a mortgage refinanced. It is only an option, though, if the current mortgage is already backed by the FHA.
How long do I plan to stay in this home?
If the homeowner expects to move in the near future, this may not be the right time to refinance. There will normally be some costs associated with the process, so it is important to calculate how long it will take to break even. If the plan is to stay in the home past that point, then it may be a good option.
Am I ready to start the refinancing process?
Just like any other loan application, it is important to be prepared. The homeowner should have a history of paying bills on time and the debt-to-income ratio should be reduced as much as possible. If there is any inaccurate or suspicious information on the borrower’s credit report, all steps should be taken to correct the problem before doing anything else.
There are numerous factors that influence the approval process of an FHA refinance, but answering these questions can help make it less daunting and more manageable.