Homeowners who secured their housing loans when the interest rates were high are now suffering from high and unaffordable monthly mortgage payments. In the current economic climate, making mortgage payments for a loan with a high-interest rate, coupled with an unstable job situation, is a lot tougher than many people expected.
Some homeowners simply walked away from their mortgage because the home purchase loan has a higher balance than its free-market value, a classic example of an underwater mortgage. A homeowner in this situation cannot sell his home because he will be left with nothing.
The only option left for homeowners who cannot afford anymore to pay their monthly mortgage payments, as well as other outstanding financial obligations, is to refinance the current loan into a new loan that charges a lower interest rate. Currently, FHA refinancing loans charge 3.25% of interest.
Many homeowners today purchased their homes at 5% to more than 6% interest rates. At 3.25% interest rate, a homeowner will only be paying $435.00 per month for every $100,000 of the loan. It means a home valued at $400,000 will only be paying $1,740.00 monthly, a great reduction in payment compared to when they were paying the loan at 5% or 6% of interest rate.
Refinancing is the best option for homeowners who are behind and can barely afford their monthly mortgage payments. It is the best option instead of walking away from the mortgage or losing the home to foreclosure.
Refinancing is getting a new mortgage to replace the original mortgage. Refinancing allows a borrower to obtain better interest terms and rates. In mortgage refinancing, the first mortgage is technically paid off, allowing the creation of the second loan instead of just making a new mortgage and throwing out the original mortgage.
Borrowers with perfect or excellent credit history can find a better option to convert an existing variable loan rate to a fixed rate. An added benefit will be obtaining a lower interest rate. Refinancing, however, could be risky for borrowers with bad credit, or who are too far in debt.
Home loans can be classified as conventional, VA, and FHA loans. The three types of loans are similar in the sense they are all issued by banks and approved lenders but they have their basic differences as well.
A conventional loan is issued by a bank or an approved lender but is not guaranteed by the federal government. A conventional loan is risky to the lender because it is not guaranteed by the federal government if the borrower fails to repay the loan.
A borrower who pays a down payment of less than 20% on the property will be required to pay for private mortgage insurance (PMI) upon getting a conventional loan. If the borrower defaults on the payment, the mortgage insurance company will pay the lender in full. Qualifying for a conventional loan is much more difficult than applying for either FHA or VA loans.
A VA loan is issued by VA-approved lenders and is guaranteed by the Veterans Administration. The Veterans Administration protects the lender against loss if the borrower fails to repay his loan.
A VA loan is available only to current members of the U.S. armed forces, a reservist or National Guard member, a veteran, or an eligible surviving spouse. An eligible borrower can obtain a VA loan without paying any down payment and no private mortgage insurance requirement is necessary.
An FHA loan is issued by a bank or an approved lender and insured by the Federal Housing Administration. The FHA will repay the lender for the loan amount if the borrower defaults on his loan.
An FHA loan can be obtained with better terms such as a low-down payment of 3.5% of the purchase price. An FHA loan charges lower closing costs, which may be included in the loan amount. It is easier to apply for an FHA loan than a conventional loan.
Homeowners, including those that do not have an FHA mortgage, can refinance under FHA Mortgage Refinancing. FHA refinancing allows an applicant to refinance up to 96.5 percent of his home’s current value. Even borrowers with less-than-perfect credit scores that are above 80 percent will benefit from the less expensive FHA loan refinancing.
A borrower can refinance under either conventional refinance or FHA refinance. The best refinancing option for a borrower will depend largely on his credit scores and the current amount of equity of the home.
The conventional loan may turn out to be the cheaper option for borrowers with excellent credit and enough equity. Borrowers with a less than sterling credit score could use FHA refinancing as the best option.
FHA refinancing is available to borrowers who are currently using the mortgaged home as their principal residence. A property that is being rented out cannot qualify for FHA refinancing. There are two types of FHA refinancing loans:
• FHA Cash-Out Refinance – This type of refinancing is advantageous to homeowners with property that has increased its market value since it was originally purchased. This type of refinancing allows a borrower to refinance his existing mortgage by taking out another mortgage for an amount more than what is currently owed.
• FHA Streamline Refinance – This type of refinancing is called streamlined as it allows the borrower to reduce the interest rate on the current mortgage in a quick manner without the need for an appraisal. This type of refinancing drastically cuts down the amount of paperwork the lender should complete, sparing the borrower money and time.
Effective March 31, 2011, FHA Refinancing regulations were modified in order to clarify and tighten some of the FHA refinance rules. One major area modified involves the Streamline Refinance program, a non-credit qualifying refinancing loan offered by the FHA.
This program allows borrowers to apply for an FHA-insured mortgage with the intention to refinance later using the FHA Streamline Refinancing loan, prompting them to opt for an adjustable rate mortgage. The plan is to refinance when interest rates get better later on.
Such plans to immediately refinance when the rates get better can no longer be done under the new rules. The new rules set a minimum amount of time an FHA borrower must own the current property and make mortgage payments to FHA before a borrower can refinance.
FHA borrowers must make at least six payments on the mortgage to be refinanced and wait until at least six months have passed from the first payment due on the mortgage. Also, 210 days must have passed from the mortgage’s closing date.
Under the revised rules, FHA refinancing no longer requires an applicant to submit certification of employment and income in order to streamline the transaction of the refinancing.
FHA loans are intended to assist low to middle-income Americans in purchasing or refinancing their home. The FHA raised its credit rating standards as an offshoot of the mortgage catastrophe of 2008.
Still, most American families have almost no trouble purchasing or refinancing with FHA. Four out of five Americans typically qualify for an FHA loan. However, FHA has imposed a limit on housing loans across the country, with the maximum set at $417,500 in average-cost areas and $729,750 in high-cost areas.
Loans and refinances guaranteed by the FHA generally carry better terms and rates than a conventional loan. The following are the general features of an FHA home loan or FHA refinance:
• The credit requirement is not as high – Even borrowers with credit scores as low as 500 may still qualify, although the ideal credit score is between 580 and 620. A borrower must show a two-year history of on-time bill payments and must have 2 years of steady employment.
• FHA loans and refinance require a lower down payment of 2%, which translates to $2,000 down payment for every $100,000 of loan.
• FHA loan or refinance allows for a higher debt to income ratio – While conventional loans allow only a maximum of 36% debt to income ratio, FHA loans allow up to 41% of income to debt ratio.
• FHA loan and refinance require mortgage insurance – An FHA borrower needs to pay a monthly mortgage insurance of 1.25% for a down payment lower than 5% of the home value or 1.20% for a down payment of more than 5% of the home value. The borrower must carry the insurance for at least 5 years. He can drop the insurance after 5 years and when the principal balance is 78% or less than the original purchase amount.
Homeowners who want to refinance to a lower interest rate can choose between a conventional refinance and an FHA refinance. The choice a homeowner who wants to refinance is largely dependent on his credit scores and the amount of money he can put up for a down payment.
A borrower who wants to refinance will have a better chance of qualifying, get better terms and interest rates, and less paperwork to work on, especially if he has less-than-sterling credit scores.
Speaking to a mortgage expert and allowing them to analyze your situation, especially your financial state of affairs, can enlighten you on the best option to take.
Catostore Home Loans can help homeowners apply for an FHA Refinance. The company takes pride in providing superior customer service and creating satisfied customers. The company works to satisfy the different mortgage needs of their customers while eliminating all the common problems mortgage applicants typically experience.
Homeowners that work with Catostore Home Loans get the best options and benefits they may be entitled to.