Can I Refinance an FHA Loan? What You Need to Know

Cardinal Financial February 7, 2024 | 5 min read
Thumbnail Image

If rates have dropped since you closed on your government-backed FHA loan, you’re likely asking yourself “Can I refinance an FHA loan?” The short answer: Yep. The long answer:  Let’s delve into whether refinancing your FHA loan is the smart choice for your situation, and what you need to make it happen.

Should I refinance my FHA loan?

Refinancing (of any kind) is essentially just paying off one loan by getting another loan. The rule of thumb is that if you can benefit from a refinance, either by getting better loan terms or a lower interest rate, you should consider doing it. There are plenty of great reasons for homeowners to refinance their mortgage, including:

  • Lowering their monthly payment
  • Paying off their loan sooner
  • Switching from an adjustable-rate loan to a fixed-rate loan
  • Tapping into home equity to take cash out

If you’re looking to take advantage of a lower interest rate, better loan terms, or get cash out, you should consider a refinance.

What are my FHA refinance options?

If you want to refinance your FHA loan, there are two basic options: Refinance to a different loan type, or refinance to another FHA loan with new terms.

Refinance to a different loan type

You can replace your FHA loan with another one, such as a Conventional loan, which isn’t backed by the government. While it may be harder to qualify for, there are plenty of benefits that come with a Conventional mortgage. For starters, you could avoid mortgage insurance entirely by replacing your FHA loan. As long as you’ve reached 20% equity in your home, you won’t have to pay any mortgage insurance on a Conventional loan.

Pro Tip: Simplify your budgeting and see what rates you can expect with our refinance calculator.

Refinance to another FHA loan

If you decide to stick with an FHA loan, you’ve got a few options for your refinance.

FHA rate-and-term refinance

Most homeowners opt for a rate-and-term refinance to either take advantage of a better rate or switch from an adjustable-rate mortgage to a fixed-rate mortgage. Lenders will require you to go through a credit qualification process and a new appraisal when you apply for the loan. However, it’s possible you could get a better interest rate if you’ve built up equity in your home.

FHA Streamline refinance

Like the name suggests, this loan is more streamlined than a rate-and-term refi because it allows you to refinance with less paperwork and fewer steps. Not only can you lower your interest rate, reduce your monthly payment, or shorten your loan term, you can get it done without having to go through a home appraisal, provide bank statements and your credit report, or verify your income. The lender will just use the information gathered from your initial FHA loan. The Streamline is a better option when your home hasn’t risen much in value, or you’re planning to sell your home soon, because it helps you avoid adding closing costs to your principal balance.

FHA cash-out refinance

If you need cash to make home improvements, consolidate debt, or anything else, the FHA cash-out refinance* is for you. A cash-out refi allows you to take out a loan that’s bigger than your current mortgage, pay off the original loan, and pocket the difference. You can use the cash for whatever you need. You must have at least 20% equity in your home to qualify.

*Using your home equity to pay off debts or make other purchases does not eliminate the debt or the cost of the purchases, but rather increases the loan amount of your mortgage to be paid according to your new mortgage terms.

FHA 203(k) refinance

Planning home renovations? Consider refinancing to an FHA 203(k) loan. This loan is specifically designed to roll your project costs and mortgage into one convenient loan. Why is that a good idea? If you take out a separate loan or pay for renovations with a credit card, you could have to pay more closing costs and higher interest rates. Plus, you’ll take more than one hit to your credit.

More questions to ask to determine if you can refinance your FHA loan.

Is it the right time to refinance my FHA loan?

If you already have an FHA home loan, and you’ve made at least six months of on-time payments, you should be good to go refi. For FHA cash-out refis, you should provide 12 full months of on-time payments.

Are there closing costs?

Like any loan, there are closing costs, but with a Streamline refi, you won’t have to pay for a credit report or appraisal like you might with other loans.

Will I still need to pay mortgage insurance?

If you refinance your FHA loan to another FHA product, you’ll still need to pay mortgage insurance premiums (both upfront at closing and in monthly payments) on your new refi.

What documents will I need to refinance my FHA loan?

For most FHA refinances, you’ll need to provide your credit report, full income and employment verification, and undergo a home appraisal. You should also check with your lender to find out any specific documentation you may need to provide for your refinance.

Can I refinance an FHA loan: Final takeaways.

To answer your initial question, you absolutely can refinance your FHA loan. Whether or not you should, and which type of refinance is right for you, depends on your financial goals, your homeownership plans, and current market conditions. If you’re not sure where to start, our team is here to help.

If you want to refinance your FHA loan, there are two basic options: Refinance to a different loan type, or refinance to another FHA loan with new terms.

Ready to make moves?

One of our loan originators is standing by to assist you with your free rate quote.
Share this: twitter linkedin facebook