When to Choose an FHA Refinance Over a Conventional Mortgage

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If you’re a homeowner who’s thinking of refinancing to get lower mortgage payments or to change mortgage terms, you have a few loan options. Two common loan types are Federal Housing Administration loans and conventional mortgages.

What Is an FHA Loan and How Is It Different From Other Mortgages?

FHA loans are government loans guaranteed by the U.S. Federal Housing Administration, which enables lenders to relax some qualifying criteria for borrowers. By contrast, no U.S. governmental body guarantees conventional loans, which conform to other lending criteria.

FHA loans and conventional loans differ in other ways, including:

• Qualification criteria
• Fees and costs
• Mortgage rates

Those differences can cost you a lot of money — for a long time. So make sure you know the details before you apply. Review current mortgage interest rates today and decide if getting an FHA refinance or a conventional mortgage works best for you.

Here’s how FHA mortgage rates compare to rates of other mortgages:

FHA Refinancing vs. Conventional Mortgages
Lender		30-Year Fixed Rate	30-Year Fixed Rate FHA	30-Year Fixed Rate VA	15-Year Fixed Rate	7/1 ARM	5/1 ARM
	National Average	3.94%	N/A	N/A	3.19%	N/A	3.11%
	Wells Fargo	4.000%/4.061%	4.500%/5.520%	3.875%/4.166%	3.375%/3.445%	3.625%/3.873%	3.500%/3.881%
	Citibank	4.0%/4.148%	N/A	N/A	N/A	N/A	N/A
	Bank of America	3.875%/4.075%	N/A	N/A	3.250%/3.528%	3.125%/3.762%	2.750%/3.747%
	Chase Bank	3.875%/3.958%	N/A	N/A	3.125%/3.307%	3.375%/3.778%	3.250%/3.816%
	US Bank	3.950%/4.021%	3.625%/4.682%	3.750%/4.088%	3.250%/3.374%	N/A	N/A
	PNC Bank	3.875%/4.013%	3.625%/4.472%	3.750%/3.969%	3.125%/3.326%	3.250%/3.819%	3.000%/3.820%
	TD Bank	4.000%/4.060%	N/A	N/A	3.375%/3.480%	N/A	N/A
	BB&T	4.000%/4.084%	N/A	N/A	3.125%/3.271%	N/A	N/A
	Capital One	4.000%/4.061%	N/A	N/A	3.375%/3.481%	3.375%/3.776%	3.250%/3.792%
	SunTrust Bank	4.125%/4.1975%	3.800%/4.8853%	3.800%/4.0071%	3.400%/3.5261%	3.490%/3.8488%	3.625%/3.9380%
Rates accurate as of June 1, 2017

Related: How to Pay Off Your Mortgage in 10 Years

Comparing FHA vs. Conventional Mortgages

The most important difference between the two types of loans relates to mortgage insurance rules for each, according to Casey Fleming, author of “The Loan Guide: How to Get the Best Possible Mortgage.” 

With an FHA mortgage, you have a monthly mortgage insurance premium for the life of the loan. In addition, you pay an upfront fee of 1.75 percent of the loan amount when you get the loan.

“With conventional loans, if you have mortgage insurance, the lender must remove it if you bring your loan amount down to under 80 percent of the original purchase price of the home or the appraised value at the time the loan was put in place,” Fleming said.

Another key difference is the qualifying criteria for each loan type. “FHA will generally allow lower credit scores than conventional loans, all things being equal,” Fleming noted. “So if you have credit bruises, then FHA might be a better alternative.”

Major credit dings resulting from bankruptcies, foreclosures or short sales are forgiven sooner with FHA loans. “For example, you must wait seven years after a foreclosure before you can get prime conventional financing, but the waiting period for FHA is only three years,” Fleming said.

Another difference is the down-payment requirement, Fleming said. The minimum down payment allowed with an FHA loan is 3.5 percent, whereas conventional loans allow a minimum of 3 percent. But “[the] qualifying criterion for [a] very-low-down-payment conventional loan is very high,” Fleming added. “For FHA, they are more attainable. So, unless you have excellent credit, stable income from W-2 income and some savings, it might be easier to get into a home with a low down payment with FHA.”

FHA Refinance Rates

As with other types of loans, FHA loan rates are based on current market conditions, as well as on your credit score and other factors. If you have good credit, these rates should be similar to what you would qualify for with a conventional mortgage. If you have poor credit, your rates will be higher, but the FHA applicant criteria can make it easier for you to qualify.

Pros of FHA Home Loan Refinancing

For some borrowers — especially those with less-than-stellar credit — FHA refinancing provides attractive advantages, such as:

• Low down payments: You can qualify for an FHA home loan with a down payment as low as 3.5 percent.
• Modest credit requirements: Lenders will accept applicants with less-than-stellar credit scores. Even if your FICO score is 580 or less, you might still qualify, according to FHA.com, which provides information about FHA loans.
• Competitive rates: FHA refinance mortgage rates are comparable to those of conventional loans, according to FHA.com.

Cons of FHA Refinancing

Before you pursue an FHA loan, make sure you are aware of the following disadvantages:

• Required mortgage insurance: All FHA loans require the borrower to pay a monthly mortgage insurance premium. The typical annual rate is approximately 0.85 percent of the loan amount, according to mortgage market expert Dan Green of The Mortgage Reports website.
• Required upfront mortgage insurance premium payment: FHA loans come with an additional mortgage insurance called an upfront funding fee, which is 1.75 percent of the loan amount.
• Permanent mortgage insurance: Unlike conventional mortgages — in which the mortgage insurance is removed when certain equity requirements are met — the FHA mortgage insurance premium lasts for the life of the loan. 

Find Out: How to Refinance Your Home With FHA Mortgage Rates

Conventional Mortgage Rates

Conventional current mortgage rates are established in the same way as FHA refinance interest rates. The Federal Reserve sets an initial rate on which banks base their interest rates. As those interest rates rise, mortgage rates often follow in the same direction.

As with FHA loans, your current credit score affects your personal loan rate. Because of the guarantees that come with an FHA loan, conventional mortgages might carry higher interest rates than FHA loan rates. However, this cost can be worth paying if it means you’re getting a loan that doesn’t require you to pay for private mortgage insurance.

Pros of Conventional Mortgages

Here are a few of the advantages conventional mortgages hold over FHA loans:

• Optional premium mortgage insurance: If you put 20 percent or more down on your home, or you have 20 percent equity in a refinance, you will not need PMI.
• Available for second homes: Unlike FHA loans, conventional loans can be used to purchase second homes and rental properties.
• Lower payments: Because you might not have to carry PMI, your monthly payment might be lower for a conventional loan compared to an equivalent FHA mortgage, which requires mortgage insurance.

Cons of Conventional Mortgages

Conventional mortgages are not for everyone. Make sure you know their disadvantages of conventional mortgages:

• Higher credit scores required: FHA loans are attainable with a credit score as low as 500, whereas conventional loans require a score of 620 or higher.
• Difficult to qualify with bad credit: If you have had a major credit event, such as foreclosure or bankruptcy, it will affect your ability to get a conventional loan.
• PMI based on credit score: Unlike FHA loans, your credit score has a big impact on the size of your mortgage insurance obligation.

Learn: How to Find the Best Mortgage Lenders

Types of FHA Refinancing Options

You can choose from more than one type of FHA refinance. Know what each option entails.

FHA Streamline Refinance

The FHA streamline refinance is open to those who want to refinance their existing FHA mortgage with another FHA mortgage. According to the U.S. Department of Housing and Urban Development, the term “streamline” refers to the amount of paperwork involved, which is less than a normal refinance. “Streamline” does not refer to the criteria or fees and costs involved.

FHA Cash-Out Refinance

The FHA cash-out refinance is open to those with either a conventional or FHA loan. As the name implies, this option allows you to cash out a portion of your equity. Requirements include an 85 percent or 95 percent loan-to-value limit. If you do not know or understand what your LTV ratio is, check with a mortgage professional.

FHA No-Cash-Out Refinance

An FHA no-cash-out refinance option is available for those who don’t want to take any cash out of their refinance. The limit of the loan amount is 100 percent of the appraised value of your property, including any upfront mortgage insurance premium.

FHA Short Refinance

According to HUD, the FHA short refinance option is for non-FHA loans only. If you owe more than your home is worth, this option allows you to refinance the home to align your debt more closely with your home’s current market value. Criteria are strict and include, but are not limited to, being current on your payments, having a FICO credit score of at least 500 and living in the property.

Related: How to Refinance If Your Home Appraisal Value Is Too Low

Is FHA or Conventional Refinance Better for You?

Because of the significant differences between FHA mortgages and conventional mortgages, it’s crucial to make the right decision for your situation. Fortunately, there are some clear ways to do that.

FHA generally is the more expensive option for three reasons:

• Upfront funding fee
• Monthly mortgage insurance
• Mortgage insurance requirement for the life of the loan

“For this reason, conventional is always better, if you qualify,” Fleming said.

Barri Segal contributed to the reporting for this article. 

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