How to Refinance Your Home With FHA Mortgage Rates

Refinancing can be a difficult task for homeowners facing obstacles like sub-par credit, little equity in their homes, or worse yet, homes that are completely underwater. But thanks to the Federal Housing Administration (FHA), refinancing to potentially better FHA mortgage rates has become a reality for many homeowners.

With a refinance, homeowners can restructure their mortgage to take advantage of low FHA mortgage rates, and might also be able to factor in any equity their home has accrued to lower PMI payments. An FHA refinance can significantly lower monthly mortgage payments, and in many cases could make the difference that allows a homeowner to avoid default or foreclosure.

Because of this, an FHA refinance can be a smart move to save money now and later. Below is a breakdown of the three main types of FHA refinance loans available, qualifications for approval, and the interest rates currently available for each.

Read: What to Do If You’re Denied a Mortgage Loan Refinance

3 Main Types of FHA Refinance Loans

1. FHA Streamline Refinance

According to the New York Times, a FHA streamline refinance is the quickest way for current FHA mortgage holders to refinance into today’s FHA mortgage rates. That’s because income, employment, home appraisal and credit score are not re-verified which “streamlines” the process. Your refinance application simply reuses your information from your first FHA loan to calculate the terms of the new loan, which will likely have to be with the same bank.

The major requirements for lender approval of an FHA streamline refinance include being current on mortgage payments, and that the refinance must lower the monthly mortgage principle and interest payments, according to HUD.gov.

Because the FHA streamline refinance does not require a new home appraisal, it’s a fantastic option if you’re underwater on your current mortgage. As a matter of fact, the FHA encourages homeowners who are underwater to apply. Beyond the underwater aspect, the refinance works like any other home loan and is available as a fixed or adjustable rate mortgage and comes in a 15- and 30-year term. In order to protect approved FHA lenders, homeowners might still be required to pay PMI.

Related: How to Refinance With No Closing Costs

2. Cash-Out FHA Refinance

The beauty of the cash-out FHA refinance is that it grants access to much-needed cash that is tied up in a home, up to 85 percent of the home’s value at purchase or value according to a new appraisal. Cash-out funds are most often used towards home improvements, paying down high-interest debts like credit card balances, or covering education costs. Plus a cash-out refinance often allows a homeowner to lock in lower FHA mortgage rates or change the length of the term if necessary.

You must have a current FHA loan and enough equity in the home to cover what you “cash-out”in order to qualify. A cash-out FHA refinance also has the following requirements:

• Total monthly housing costs after refinance must stay below 29 percent of gross monthly income.
• Your have owned the home for at least 12 months.
• You are the primary occupant of the home.
• You are current on mortgage payments.

The biggest disadvantage is that a cash-out FHA refinance is a riskier product for lenders and thus will require both an upfront mortgage insurance payment as well as a monthly insurance premium, which will be determined by the loan-to-value ratio and the date of your FHA loan origination. If you have significant equity in your home, bypass these insurance premiums altogether by considering a standard, non-FHA cash-out refinance.

3. Rate-and-Term FHA Refinance

Unlike the first two refinance options, a rate-and-term FHA refinance doesn’t require you to have a current FHA home loan to qualify. This refinance option could make a lot of sense if you don’t have enough equity in your home to qualify for a conventional mortgage refinance, your credit is less than perfect, or you have other large debts. For instance, those with credit scores of 500 and over can qualify, and those with debt can have total debts equal to 50 percent of gross monthly income, greater than the 43 percent limit on conventional loans.

In order to qualify you’ll typically need at least two years of steady employment. Similar to the first two FHA options, a rate-and-term refinance will also require upfront and monthly PMI payments in order to protect lenders.

Read: Are FHA Refinance Rates Better Than Conventional Mortgages?

Current FHA Refinance Rates

Most banks and mortgage lenders offer the above and other FHA refinancing options. FHA refinance rates must follow guidelines set by the FHA but are still set by lenders and include a range of lower and higher rates. This means that if you’re planning to refinance it’s worth it to shop around to compare FHA mortgage rates and find the best deal. HUD.gov has a handy search tool to help you find FHA approved lenders and banks in your area.

Currently, FHA mortgage rates for a 30-year fixed refinance are hovering around 3.75%, reports Mortgage News Daily. Because of the PMI payments required to qualify for a FHA refinance, however, the APR of an FHA refinance could be significantly higher than conventional home mortgages. But if you have little or no equity, or terrible credit, a FHA refinance could still be a solid option.

This article originally appeared on GOBankingRates.com: How to Refinance Your Home With FHA Mortgage Rates

This article by Kyle James first appeared on GoBankingRates.com and was distributed by the Personal Finance Syndication Network.