FHA Loans Provide Mortgage Refinance Options for Low Home Equity

By Karen Lawson
Mortgage Credit Problems Columnist

As mortgage rates stay near record lows, homeowners who've lost home equity due to falling home values may feel as though they're sitting on the sidelines while everyone else is getting unprecedented deals on refinancing their mortgages. Here's some good news. Whether or not you have an FHA loan, you may qualify for refinancing your mortgage with a new FHA loan. The first thing you should do when considering refinancing is to determine what your potential savings would be. Use a refinance calculator to compare your current mortgage to a refinance mortgage.

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Already Have an FHA Mortgage? Try a Streamline Refinance

The FHA streamline refinance program is designed to give homeowners with existing FHA loans the opportunity to refinance with less paperwork than traditionally required for a brand new mortgage refinance. Eligibility requirements for streamline refinancing include:

  • You must have an FHA-insured mortgage on a one- to four-unit residential property.
  • Refinance terms must lower your monthly principal and interest (P&I) payment or benefit you in some other way. For example, refinancing from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage (FRM) stabilizes your monthly payments and may eliminate mortgage features that take longer to pay off.
  • Payments on the mortgage being refinanced must not be delinquent.
  • Cash out refinancing cannot be done through the streamline refinance program.

Streamline refinancing provides three ways of handling closing costs. You can pay closing costs up front. If you don't have the funds available to pay closing costs, you can have your mortgage lender pay closing costs in exchange for a slightly higher mortgage rate. Finally, if you have enough equity in your home, you may be able to add allowable closing costs to your refinance amount.

Benefits of FHA Mortgages

If you've experienced credit problems, reduced income, or other financial issues, refinancing with an FHA loan may be your best option. FHA underwriting guidelines are more lenient than conventional loan requirements, and you may qualify after filing a bankruptcy provided it's been at least two years since your bankruptcy was discharged. FHA loans require as little as 3.5 percent down and can be approved using alternative credit if you have little or no established credit.

Using mortgage calculators for comparing mortgage rates, home refinance terms, and determining affordability can help you find home refinance terms meeting your needs and budget.

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