One of the most common questions we get at Mortgage Refinancing Buzz is “What is the difference between conventional home refinancing and FHA refinance loans?”  Both types of mortgage refinance loans are useful loan product and each program offers unique refinancing benefits for specific situations.  Let’s compare the both loans and see if we can find out which refinance mortgage best suits your needs.  Both conventional and FHA loan requirements have changed significantly in 2010, so discuss your eligibility with an experienced loan officer before making refinancing decisions online.

A conventional refinance loan is a traditional mortgage used to refinance an existing mortgage that stays within the conforming loan limits of $417,000.  In most cases, this loan product ensures the lowest possible mortgage refinance rates.  Conventional refinancing guidelines allow borrowers to take cash out up to 80% and usually the cash out will cost the borrower .25 of a point in closing costs.  So on a $100,000 mortgage, a borrower would pay the lender $250 for the cash out feature.  At the time this article is being published, conventional refinance loans are being reported at 4.625% fixed on thirty-year mortgage paying 1% point in origination fees.  There is no cost for private mortgage insurance for loans that do not exceed 80% loan to value.

FHA refinance loans are similar to the conventional mortgages, but there are a few differences.  First of all, FHA home loans require mortgage insurance.  The only time is doesn’t is when a borrower takes out a 15-year FHA loan below 90% with no cash out.  Cash out refinancing with FHA is allowed up to 85%.  This is 5% more than the conventional loan offers, so if a borrower needs more cash out, then the FHA refinance is the loan of choice.  If a borrower has some credit issues in the past, then FHA refinancing is likely the best choice because FHA guidelines are typically more forgiving when it comes to credit issues.  Another advantage FHA refinance loan has is that the loans are assumable.  That means if you sell the house, the buyer could theoretically assume your loan.  When mortgage rates start to go up, the assumable feature good be a significant benefit, because the new borrower would get the fixed rate that original borrower locked into.  Another feature borrowers like with FHA loans is that there is no pre-payment penalty. Whereas with some conventional loans the borrowers have pre-pay penalties.  The most popular feature of FHA refinancing has to be the streamline option.  When a borrower has a FHA mortgage and they seek refinancing with no cash back, the FHA streamline allows the borrower to get a low rate refinance with reduced closing costs.  FHA streamline refinancing allows FHA customers to refinance anytime the market rate drops into a position that would save them money.  During uncertain times the FHA refinance offers protection that if the rates drop, the FHA borrower can reap the benefits.