Excellent Credit and FHA Loans May Not Be the Right Mix

If you have excellent credit and an FHA loan, you may be spending more on your mortgage than you have to. 

A good credit score can not only impact whether you’ll be approved for a mortgage, but it can also affect how much you’ll have to pay. 

2020 saw more and more homeowners investigating record-low interest rates to consider whether refinancing would be beneficial. According to the mortgage data firm, Black Knight found that a whopping 18 million U.S. homeowners stood to save money if they refinanced their existing mortgage. 

6 Ways Refinancing Can Help You Save Money

Many first time home buyers or those with challenging credit profiles often find success with an FHA-backed mortgage. But as your credit rating improves, refinancing your FHA loan to a conventional mortgage can often mean reducing the amount of your monthly mortgage payment. And the lower interest rates can translate into saving thousands of dollars over the lifetime of your mortgage.

1. Get Rid Of The MIP On Your FHA Mortgage

FHA-back loans require borrowers to pay mortgage insurance. This can take a couple of different forms. Either as a one-time, upfront mortgage insurance (UFMIP) payment based on your total mortgage amount or calculated annually. The annual mortgage insurance premium (MIP) amount is divided equally and applied to monthly payments for your mortgage’s entire term. 

  • Mortgage Insurance Premium (MIP) is paid on FHA loans with less than 20% down payment. Borrowers will either pay a UFMIP or an annual MIP. 
  • Up Front Mortgage Insurance Premium (UFMIP) is a one-time premium paid at closing when you initially get your FHA loan. UFMIP isn’t paid in cash but instead rolled into the total amount of your home loan. 

Switching from an FHA mortgage to a conventional loan allows you to get rid of the mortgage insurance (MIP). If you’ve paid down your mortgage (typically around 20% of your home loan value), you can usually eliminate MIP. If you haven’t paid down 20% and still need to pay the mortgage, conventional loans often offer cheaper rates for borrowers with excellent credit than FHA loans. 

2. Stop Paying Mortgage Insurance Altogether

If you’ve built up some home equity, equal to 20% of your mortgage, you can avoid having to pay any insurance. Private Mortgage Insurance (PMI) is applied to all mortgages with less than a  20% downpayment. This can not only lower the amount you have to pay out each month but can save you thousands–sometimes tens of thousands–of dollars over the lifetime of your mortgage.  

3. Don’t Pay Too Much With An Adjustable-Rate Mortgage (ARM)

If you have an FHA adjustable-rate mortgage, changing to a fixed-rate mortgage can help you save money. ARMs are often great mortgage products for first-time homeowners. Still, as interest rates begin to fluctuate and rise, homeowners can find themselves paying more for their mortgage than they can comfortably afford. 

With excellent credit, a fixed-rate mortgage can offer a stable, affordable mortgage payment for the long run. Switching now, while interest rates are at an all-time low, means you can lock in low rates and protect yourself against future interest-rate increases. 

4. Don’t Pay An Interest Rate That Is Higher Than Current Market Interest Rates

If you’re paying a higher interest rate compared to interest rates currently available, you’re leaving money on the table – money that you could put in your bank account. The higher your credit score, the lower the interest rate you’ll be able to get. A lower interest rate means a smaller payment each month. Excellent credit can also translate into fewer fees or additional surcharges. 

Lowering your interest rate is a simple and straight-forward way refinancing your FHA loan can help save you money.

5. Have A Shorter Mortgage Term

Shortening the length of your mortgage, even by just a few years, can help you get out of debt sooner. While it might raise your monthly mortgage payment amount, your excellent credit rating can often help you get a lower interest rate. Also, because you’ll be paying off more of your loan principal, you’ll be building home equity faster. 

6. Take Money Out Of Your Home

If you’ve built up equity in your home, refinancing with excellent credit can help you tap into the money in your house. Through CashOut refinancing options, you can get a loan for more than the existing amount of your current loan, pay off your initial loan, and receive the excess cash. This extra cash comes without restrictions allowing you to spend it however you see fit, whether to consolidate existing debt, invest in home renovations, or even plan for a major expense like a vacation or wedding. Many homeowners find taking the cash out of their homes to be more economical than exploring high-interest loans or making purchases on a credit card.

How To Decide If Refinancing an FHA Mortgage Loan Is Right For You?

Deciding to refinance your home should never be a spur-of-the-moment decision. It requires careful consideration of your overall financial health, your current credit score, and history, as well as your financial goals.

If refinancing allows you to reduce your interest rate by at least half a percentage point, many homeowners generally view refinancing as a positive step. Other considerations include 

  • Reducing monthly payments 
  • Making your mortgage more affordable
  • Shortening the length of your mortgage
  • Making home improvements that can increase your home’s comfort and value,  
  • Having a safety net of cash available for emergencies

At the end of the day, you’re the only one who can decide what’s right for your family. That’s why the FHA refinancing mortgage experts at River City Mortgage want to sit down with you in our office, at your kitchen table, or over the internet, to give you all the information you need to make an informed decision. And if you decide to refinance, we can streamline your mortgage application process, too. 

You shouldn’t have to struggle to pay for your home. If you’d like to find out what you can do to make your mortgage more affordable, get in touch today. 

Photo by Brandy Kennedy on Unsplash

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