Mortgage refinance options are plentiful and can be confusing. Homeowners should carefully compare FHA vs conventional loan options -- their features, benefits and costs -- to choose the most appropriate loan for their circumstances. Refinancing a mortgage with an FHA home loan is more expensive than it used to be, and may not be the best deal, even for homeowners with blemished credit.
Those whose mortgages are backed by either Fannie Mae or Freddie Mac may qualify for the government's Home Affordable Refinance Program (HARP). This program was designed to help people with little home equity, zero equity or even negative equity refinance without the extra costs and mortgage insurance that would otherwise apply. Not all mortgage lenders offer HARP loans, and rates are not set by the government, so eligible borrowers should shop carefully and compare offers from competing lenders. For homeowners who qualify, the HARP refinance is almost certainly a better deal than an FHA home loan.
FHA Mortgage Costs
FHA mortgage rates typically run about .25 percent lower than conventional loan rates, and FHA doesn't add surcharges tor borrowers with low credit scores. Annual FHA premiums are based on loan-to-value and loan amounts; the higher the loan-to-value ratio and loan amount, the higher the annual FHA premium will be. A 95 percent mortgage of under $625,000 would have a one-time upfront mortgage insurance premium of 1.75 percent and an annual mortgage insurance premium of 1.30 percent.
Costs Associated with Conforming Mortgages
Here is a partial look at some of the extra fees that homeowners might pay when refinancing with a conforming mortgage (a home loan that conforms to guidelines set by Fannie Mae and Freddie Mac).
For example, in addition to the .250 percent fee charged on all Fannie and Freddie loans, homeowners refinancing with a 625 credit score and a 95 percent loan would pay an extra 3.25 percent in fees (3.75 percent if the property is a manufactured home). Refinancing a $200,000 loan on a manufactured home with a 95 percent loan-to-value ratio and a 625 credit score would cost a total of four extra points, or $16,000!
A point is equal to one percentage point of the original loan amount before any fees or costs are rolled into the new refinance loan. One point for a $200,000 mortgage would be $2,000; four points would be $8,000.
Conventional Loans and Private Mortgage Insurance
Conventional mortgages of more than 80 percent of a home's appraised value require private mortgage insurance. Not to be confused with homeowners insurance, private mortgage insurance protects mortgage lenders from losses caused by mortgage defaults and foreclosures. Private mortgage insurance premiums vary according to the borrower's credit score and the loan program (adjustable mortgages have higher premiums than fixed loans and 15-year mortgages have lower premiums than 30-year loans). As with FHA mortgage insurance, premiums are added to the monthly mortgage payment. There is no upfront premium charged for private mortgage insurance, and homeowners can typically cancel coverage once their mortgage balances fall below 78-to-80 percent of the property value.
Comparing the FHA vs conventional loan may not be useful in all circumstances. FHA loans may be the only option available to homeowners who cannot qualify to refinance with a conventional loan, and conventional loans may be the only answer for those who want to refinance with cash-out, interest-only payments or other features. While FHA mortgage insurance is an additional expense, FHA loans are sometimes the only route for those who cannot meet conventional loan requirements due to higher debt, lower credit scores, or an inconsistent employment history.