When taking out a mortgage, it’s important to consider the different premiums and costs that come with the different types of loans. Many first-time homeowners choose loans with the Federal Housing Administration (FHA), as financing is easy with only minimal down-payments and good credit scores.
However, there are also some drawbacks despite FHA’s obvious advantages. Certain premiums for mortgage insurance can weigh down on the borrower’s budget and make it much costlier in the long term. An option to consider in this case would be refinancing an FHA loan into a conventional mortgage.
By learning the differences between different loans’ mortgage insurance premiums and costs, you’ll be more equipped to decide whether refinancing your FHA loan in Los Angeles is the right choice.
What are Mortgage Insurance Premiums?
Borrowers can pay two kinds of mortgage insurance in an FHA loan: monthly mortgage insurance payments (MIP), which are required for the entire duration of the loan, or one-time uproot mortgage insurance premiums (UFMIP).
If you’re doing an MIP, it can cost anywhere between 0.45% to 1.25% of your loan balance all throughout the FHA loan’s duration. Depending on the amount you loan, this can amount to anywhere from $100 to $500 to be paid additional to your monthly payment. Depending on the interest rate you’re eligible for and the total amount your insurance payment requires you to add, the amount you pay monthly may be lower or higher if you refinance over to a conventional loan, even with a higher interest rate.
The UFMIP, on the other hand, is comprised of 1.75% of your principal balance, which you pay at closing. That means you’ll be paying an upfront mortgage insurance premium of $1,750 if you apply for a $100,000 year FHA for a fixed period of 30 years. You must also take into consideration your annual premium.
Refinancing an FHA Loan
There are several advantages and disadvantages between an FHA loan and refinancing to a conventional one that should be considered before making a move to either.
Minimum requirements are needed to refinance an FHA to a conventional loan. If you have 20% equity in your home, you can remove lifetime private mortgage insurance (PMI) and meet the equity minimum for a conventional loan. However, not meeting this minimum will require you to account for the PMI costs until you reach at least a 78% loan-to-value ratio.
Advantages of Refinancing from FHA to Conventional Loan
With home values on the rise and Los Angeles mortgage rates continuing to fluctuate, homeowners are provided with more equity and the opportunity to refinance into conventional mortgages.
Why switch to a conventional loan in the first place if FHA interest rates are typically much lower? An advantage of conventional loans is that they can do away with the mortgage insurance requirement altogether. Although credit requirements are stricter, once the homeowners have reached 20% equity in their homes and a 78% loan-to-value ratio, mortgage insurance provisions are canceled. Refinancing to conventional loans will also allow you to take out a loan in a larger sum.
Disadvantages of Refinancing from FHA to Conventional Loan
While refinancing has benefits that can bring down your monthly cost, it is not without its own costs. Closing fees are still present for conventional loans. You may also be required to provide the same original documents in the application process when you bought your home. You might also need to appraise your home before refinancing your loan.
Shannon Christenot for FHA Loans in Los Angeles
Choosing whether you refinance your FHA to a conventional mortgage needs time and careful decision-making. With the help of the best mortgage company in Los Angeles that you can find, consider your goals, your home’s current value, and whether the move makes financial sense. Most of all, the right mortgage company will help you figure out if you can afford the move without making too big a dent in your current monthly expenses.
Taking out a home loan in Los Angeles with different options can be challenging to make. Here at Shannon Christenot, we embrace the diversity of Los Angeles and work with customers from every walk of life. Whether you’re a first-time homebuyer or shopping for your next home, we can match you with the right mortgage. For more details, contact us at (818) 601-2231 or visit our website today!