If you have been thinking about refinancing your FHA mortgage, yet cringe at the thought of paying that upfront mortgage insurance premium again, you are in luck. If you originally obtained your FHA mortgage less than 36 months ago, you may be entitled to a refund of the initial premium that you paid. This money can then be used towards the mortgage insurance premium on the new mortgage, allowing you to take advantage of today’s lower rates without throwing more money at insurance that you will never get back even when you sell your home.
HOW UPFRONT MORTGAGE INSURANCE PREMIUM WORKS
The upfront mortgage insurance premium is paid at the closing. It is 1.75% of your loan amount. On a $250,000 loan that is $4,375. This is a lot of money to come up with and then virtually throw away if you want to refinance, which has kept many people away from refinancing into lower rates. If your loan was opened less than 3 years ago, however, you can get a portion of that money refunded to you. It will not be given to you as cash; it will go towards your new upfront mortgage insurance premium, reducing the amount that you owe at closing. The amount that you get refunded is directly related to the amount of time that you have held the loan. The longer you have it, the less money you will get back. For example, if you refinance after 1 month (which most people don’t do), you get 80% of the insurance refunded back to you. After that first month, the percentage drops 2 points every month. So the second month is 78% and so on, until you hit the 36th month, which you get 10% of the insurance back as a refund.
WHO QUALIFIES FOR A REFUND OF UPFRONT MORTGAGE INSURANCE?
There are certain requirements you will have to meet in order to obtain the refund of your paid insurance, aside from the fact that it needs to be within the last 3 years that you obtained the original loan. You must be refinancing into another FHA loan, whether streamline or regular – it cannot be a VA or conventional loan. You must also not own an assumed loan, as they are not eligible for the mortgage insurance premium refund. Last, but not least, you must have made your payments on time for the duration of the loan.
WHY CONSIDER A REFINANCE?
If you purchased your home or obtained your current FHA loan a few years back, the rate is likely much higher than the rates today. If this is the case, you could stand to save several hundred dollars per month by refinancing. What has held many homeowners back is the additional mortgage insurance that they must pay upfront in order to refinance into another FHA loan. The FHA has made it easier with the refund, however, making it a better way to save money every month and potentially stop delinquencies from occurring due to the payments being too high with the higher interest rates.
If you have been on the fence about refinancing your FHA loan and is has been less than 36 months that you purchased your home or obtained your current FHA loan, look into how much you will receive as a refund. Even getting a 50% refund, which would mean that you obtained the original loan 16 months ago, could make it worth refinancing. Do the math to see how much you will save every month with the new lower rate and then see if it still works to your benefit with the mortgage insurance premium that you will have to come up with after your refund. It just may be worth it!