How To Refinance a First-Time Homebuyer Loan

Guidelines for Refinancing FHA and Other FTHB Loans

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Mortgages geared toward first-time homebuyers can offer benefits like low interest rates, low down payments, reduced closing costs, and looser credit requirements.

For some first-timers, these benefits can make the difference between becoming a homeowner and remaining a renter. A 2021 survey by the National Association of Realtors found that first-timers represented 34% of homebuyers. In the survey, 28% of first-time buyers indicated they relied on a gift or loan from relatives or friends to make a down payment, and 29% cited saving for a down payment as the most difficult part of the homebuying process.

Even though Federal Housing Administration (FHA) mortgages and other home loans can help launch someone into homeownership, borrowers won’t be stuck with these loans forever. In some cases, it might make sense to refinance a first-time homebuyer loan.  Let’s look at when refinancing a first-time homebuyer loan makes sense and the options for doing so.  

Key Takeaways

  • A homeowner may want to refinance a first-time homebuyer loan to take advantage of benefits such as a lower interest rate and lower monthly mortgage payments.
  • Refinancing a first-time homebuyer loan may result in thousands of dollars in closing costs. For some loans, these costs must be paid upfront.
  • A refinance loan may relieve you of the burden of paying for mortgage insurance.

What Is a First-Time Homebuyer?

Before we dive into when you might want to refinance a first-time homebuyer loan, let’s define who a first-time homebuyer is. A first-time homebuyer is defined by the FHA as someone who has not owned or co-owned a primary residence in the past three years.

The FHA doesn’t lend money directly to homebuyers. Rather, it backs loans made by FHA-approved lenders.

When To Consider Refinancing a First-Time Homebuyer Loan

While a first-time homebuyer loan can help someone go from renter to owner, it doesn’t necessarily have to be the only mortgage that somebody ever has for a first home. Sometimes, a homeowner with this type of loan might want to refinance it to improve their financial situation. Here are four reasons why a borrower might want to refinance a first-time homebuyer loan.

To Drop Mortgage Insurance

FHA loans come with what are known as mortgage insurance premiums (MIP). Conventional loans (those not insured by government agencies like the FHA or USDA) have something similar, called private mortgage insurance (PMI).

On an annual basis, MIP costs (in the form of upfront and ongoing premiums) often represent 0.45% to 1.05% of the loan amount. MIP payments must be made on all FHA loans, even FHA refinance loans. If your down payment was less than 10%, you must pay MIP as long as you have the loan. If the down payment was at least 10%, MIP is required for at least 11 years.

If you take out a conventional mortgage, you must pay PMI unless your down payment is at least 20%. (Even with a 20% down payment, an FHA loan requires MIP). You may be able to ditch PMI once you’ve accumulated at least 20% equity in your home based on your home’s original value.

So, how do you get rid of MIP with an FHA loan? In many instances, you must refinance your FHA loan into a conventional loan in order to escape MIP. Once you switch from an FHA loan to a conventional loan, you’ll be able to avoid PMI if you’ve reached 20% equity in your home, either by paying off enough of the principal on your loan or if your home’s value has gone up a sufficient amount.

To Lower Monthly Payments

In many circumstances, refinancing an FHA loan leads to lower monthly payments. For instance, if your credit score has improved since the time you received your FHA loan, you may be able to lower the interest rate by refinancing, which then decreases your monthly payment.

To Take Advantage of Better Interest Rates

If mortgage interest rates drop, it might be a good time to consider refinancing an FHA loan. You may be able to score a lower interest rate with a refinance (such as an FHA refinance or a conventional refinance), which should decrease your borrowing costs over the long run.

Before signing on the dotted line for a refinance, be sure to consider the closing costs. If the closing costs exceed the amount you will save over the long-run, it may not be worth it to refinance.

To Tap Into Your Home Equity

If you’ve built up equity in your home, an FHA or conventional cash-out refinance can give you access to cash for a home improvement project, debt consolidation, or other major expenses.

Generally, you can borrow as much as 80% of your home’s market value. A lender typically will review your finances, such as your credit score and the amount of debt you’re carrying, to determine whether you’ll qualify for a cash-out refinance.

Options for Refinancing an FHA Loan

Several options are available for refinancing an FHA loan. Here are four of them.

FHA Simple Refinance

An FHA Simple Refinance loan replaces your initial mortgage with either a fixed-rate or adjustable-rate mortgage.

Aside from being able to roll closing costs into the mortgage, other benefits include the ability to move from an adjustable-rate to fixed-rate mortgage and the opportunity to cut the interest rate. Some drawbacks of an FHA Simple Refinance are the need to go through a credit check and get a home appraisal, as well as the requirement to maintain MIP.

FHA Streamline Refinance

Unlike the FHA Simple Refinance loan, the FHA Streamline Refinance loan doesn’t require a home appraisal, and may not require a credit check or income and employment verification. A Streamline Refinance loan is designed to give borrowers a lower interest rate and a shorter payoff period, which should then lead to lower monthly payments.

But if your mortgage payment history isn’t so great, you may not qualify for an FHA Streamline Refinance. In addition, you’ll need to keep paying for MIP and you’ll need to cover the closing costs upfront rather than rolling them into your mortgage.

FHA Cash-Out Refinance

An FHA cash-out refinance loan lets you borrow against your equity and receive a lump-sum amount to spend on things like a home improvement project or a child’s college education. 

The credit score requirements and interest rates for these loans often are lower than they are for conventional refinance loans. Another bonus is that, unlike other FHA loans, you can refinance from a conventional mortgage to this type of FHA loan

However, just as with other FHA loans, the requirement to pay for MIP looms over a FHA cash-out refinance. And, of course, any cash-out refinance saddles you with more debt.

Conventional Refinance

Refinancing from an FHA loan to a conventional loan may enable you to lower your monthly mortgage payments, reduce the payoff period and get a lower interest rate. Plus, you can get away from MIP. But a conventional refinance loan may be harder to obtain, as an FHA loan typically has fewer restrictions, such as lower credit score requirements.

Other Options

If you’re an active-duty member of the military or a military veteran, you may be able to refinance an FHA loan into a VA loan.

Costs of Refinancing

With most refinance loans, you can expect to pay 2% to 3% of your mortgage balance in closing costs. Some refinance loans let you fold the closing costs into the mortgage, while others do not.

How To Refinance Your Mortgage

Refinancing your mortgage takes time, but the payoff can be big. Here are some of the main steps involved in refinancing your mortgage:

  • Weigh your options. This includes figuring out what type of refinance loan to seek and researching various lenders that offer mortgage refinancing. Be sure to compare the interest rates and closing costs charged by the lenders you’re considering.
  • Fill out the loan application. When you’ve settled on a lender, you’ll have to complete a loan application. You’ll likely need to supply information about your finances, such as proof of income and credit card statements.
  • Review the loan estimate. The loan estimate should include details about such things as the interest rate, closing costs and monthly payments.
  • Obtain a home appraisal. For some loans, a lender may order an appraisal to determine the market value of your home.
  • Sign the loan paperwork

Frequently Asked Questions (FAQs)

How soon can I refinance an FHA loan?

To refinance an FHA loan, you must meet certain time-oriented requirements. You must have made at least six payments on the original FHA mortgage that’s being refinanced, the first due date for the original FHA mortgage must have been at least six months ago and the original FHA mortgage must have closed at least 210 days earlier.

How long does it take to refinance a mortgage?

Refinancing a mortgage can take roughly 35 to 50 days. However, that timeframe may be shorter or longer, depending on factors like how organized you are and how quickly the lender moves through the loan process.

Article Sources

  1. National Association of Realtors. “Home Buyers Motivated by Desire To Be Closer to Family and Friends, Sellers Collected Full Asking Price.”

  2. U.S. Department of Housing and Urban Development. “First-Time Homebuyers.”

  3. U.S. Department of Housing and Urban Development. “Appendix 1.0 – Mortgage Insurance Premiums.”

  4. Consumer Finance Protection Bureau. “What Is Private Mortgage Insurance?

  5. U.S. Department of Housing and Urban Development. “Module 6: Programs and Products - Refinance,” Page 6.

  6. U.S. Department of Housing and Urban Development. “Module 6: Programs and Products - Refinance,” Pages 6, 72.

  7. U.S. Department of Housing and Urban Development. "Handbook 4000.1, FHA Single-Family Housing Policy Handbook," Page 435.