Have an FHA Loan? Say Aloha!

With the rise in Hawaii’s home values, those with an FHA loan may now have the ability to refinance out of an FHA loan and lower their monthly payment.

FHA loans allow those with little down, or insufficient income, or credit issues, or all three, to buy their slice of the American dream – owning your own home. I get so many calls from people asking about applying for an FHA loan. I always start off the conversation as to why they are specifically asking for FHA. I consider an FHA loan, the loan of last choice.

FHA loans have large upfront fees that are added to your loan balance. FHA loans also have very high mortgage insurance premiums. Unlike with other loan programs, the mortgage insurance on your FHA will never cancel. You are stuck with that premium and subsequent higher payment for the life of your loan.

Hawaii real estate values have increased on average about 5% every year for the past few years. That equates to some very good news for those that used an FHA loan to purchase their home with very little down payment. With the rise in home values, you may now have 20% equity in your home. But as stated above, mortgage insurance on FHA loans is there forever. The only way to get rid of it is to refinance.

If you used FHA to purchase a home in 2012-2014, you very well may have a 30-Year Fixed rate of 3.250%. Refinancing into a conventional loan today, would result in your new of around 4.000%. So who would want to do that? The answer is just about everyone with an FHA loan. Here is an example of someone I am currently refinancing out of their FHA and into a new Fannie Mae conventional loan:

In 2013 they purchase their home for $450,000.
They put a down payment of 3.5% or $15,750.
With the FHA upfront fees, their loan amount at closing was $441,849.
The monthly payment of principle, interest, and MI for their 3.250% rate is $2,407.02.

Today, their home is worth $510,000.
Their mortgage balance is roughly $400,000.
They now have more than 20% equity, so they can refinance without any MI premiums.
Their new mortgage rate is 4.250%.
The new monthly payment for principle and interest is $1,982.52.

By refinancing they are saving $424.50 per month.

The important lesson here is to not get caught up with what the current mortgage rates are compared to your current loan. You must take all factors into consideration to determine what is best for your unique situation. In this case, although the underlying interest rate is higher, getting rid of a pricey mortgage insurance premium made all the difference.

If you are currently in an FHA loan, or know someone who is, it is time for you to say aloha to your current mortgage.