FHA loans reach record low rates

Mortgage applications for a home refinance rose by 1.3 percent for the week ending October 7, 2011 compared to the previous week, according to the Mortgage Bankers Association (MBA). Government-insured FHA refinance applications rose by nearly ten percent last week.

If you have been watching mortgage refinancing rates drop in recent months and been frustrated by a lack of home equity, you may have been ignoring a program available to homeowners with low equity: an FHA refinance. According to HSH.com, average interest rates on a 30-year, fixed-rate FHA loan dropped to a record low of 3.94 percent during the week ending October 7.

Mortgage refinancing and FHA loans

If you currently have an FHA loan on your home, you may be eligible for a streamline refinance through your lender. A streamline refinance eliminates the need for an appraisal. You can qualify as long as you are current on your mortgage payments and the refinance will lower your principal and interest payments. You can’t take out cash from your equity with an FHA streamline refinance.

If you have a conventional loan and want to refinance but have little equity, refinancing into an FHA loan may be an option. You will be limited to financing 97.75 percent of your home value based on an appraisal. In addition, all FHA loans require mortgage insurance, so be sure to compare your monthly payments on the new loan with your current mortgage to make sure the refinance is worthwhile. FHA guidelines are a little looser than the guidelines lenders use for conventional loans, so you may be able to qualify with a credit score as low as 640 provided you meet the other requirements for the loan.

Declining home values have challenged the ability of some homeowners to refinance, but an FHA loan could be the solution to that problem.