FHA Refinance Rates: Why They Can Vary
FHA refinance rates are competitive with those available for conventional and VA loans. The FHA does not actually fund mortgages, but it insures its approved mortgage lenders against losses caused by FHA foreclosures.
The Government Does not Set FHA Mortgage Rates
FHA mortgage rates and discount points are determined by its approved mortgage lenders. Factors that influence mortgage rates include borrower credit history and scores, the loan type and repayment period. Mortgage lender policies for setting interest rates can vary, but federal fair housing rules prohibit discriminatory practices such as charging higher mortgage rates due to borrowers' race, religion, nationality, gender, familial status or disability.
Why FHA Refinance Rates Can Vary
While mortgage lenders and borrowers cannot control everything that impacts mortgage interest rates, there are a few factors that can help homeowners understand them. Here's a quick run-down.
FHA programs allow fixed and adjustable rate mortgages. Fixed rates are typically higher than rates charged for the introductory period of adjustable rate mortgages, but this can change according to the financial index that determines how an adjustable mortgage rate rises or falls.
The Consumer Financial Protection Bureau advises mortgage shoppers to ask prospective mortgage lenders the following questions about adjustable rate mortgages:
- How long does the initial interest rate apply?
- What will the interest rate be after the initial interest rate period expires?
- How often will the interest rate adjust?
- Which index is used to determine rate adjustments? What is the current index rate?
- What is the margin for this loan? The margin is the difference between the index rate associated with the loan and mortgage rate charged by the lender. For example, a 1-year LIBOR ARM with a 2.25 percent margin would have an interest rate of .58 (today's LIBOR rate) plus 2.25 percent (the margin), or 2.83 percent.
- What are the interest
rate caps for this loan? Caps are determined by lenders and limit how high a rate can go at each reset period and over the life of the loan.
Historically, 15-year mortgage rates have run between .5 and 1.0 percent lower than 30-year mortgage rates. Mortgage lenders consider shorter mortgage terms less risky and so they charge less for these loans. Homeowners who can afford higher monthly payments can save thousands of dollars in interest paid over the life of a 15-year loan compared to a 30-year loan.
The number of points paid has a big effect on a mortgage rate. Borrowers who want a lower interest rate than the "par" price (usually one point to cover the loan origination fee) provides can choose to "buy their rate down" by paying discount points.
Discount points are considered pre-paid interest and are measured as a percentage of the refinance loan amount. One point is equal to one percent of the mortgage amount; one point for a $300,000 mortgage is $3000.
Lender-paid Closing Costs
If a cash-strapped homeowner doesn't wish to pay refinancing costs out-of-pocket, he or she can either wrap the costs into the FHA refinance amount (subject to some limitations) or have the lender pay them instead. Lenders then charge a slightly higher interest rate in order to cover borrower closing costs. FHA loans offered with this provision may be called "no-cost" loans, but of course, the borrower pays the costs in the form of a higher interest rate.
FHA does not allow closing costs to be rolled into a streamline refinance loan, but it does permit homeowners to use a "no cost" option if they choose.
Homeowners seeking traditional or streamline FHA refinancing can find their best deals by shopping and comparing mortgage rates and terms with competing lenders.
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