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Why Now Is a Good Time to Refinance a Government-Backed Mortgage

Jan. 27, 2015
Managing Your Mortgage, Mortgages
I Have a Government Mortgage Loan. Can I Refinance It?
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It can be your first big break into homeownership: Getting a government-backed mortgage through the FHA, VA or USDA allows millions of borrowers the opportunity to buy a home with little or no down payment.

But if you’ve been in your home for a few years, you may be wondering if now is a good time to refinance your government-backed mortgage. And how does the refinance process differ from that of a conventional mortgage?

It may surprise you to learn that not only could this be the perfect time to refinance, but with an existing home loan backed by a government-sponsored entity such as the FHA, you may save even more than the typical homeowner who refinances.

Get ahead of rising mortgage rates

First off, dig out your mortgage info and compare your interest rate to the best current mortgage refinance rates available. The nonprofit Urban Institute estimates that an interest rate savings of 0.75% or more offers the most cost-effective refinance.

Of course, it’s best to crunch the numbers yourself by comparing the mortgage rates and closing costs of at least three lenders.

A refinance can mean increased savings on government-backed loans

The same study by the Urban Institute estimated that almost 2.5 million FHA borrowers could save money by refinancing. That’s more than one-third of all homeowners with FHA-backed loans.

That’s thanks to potentially lower mortgage interest rates, and also because of a trend toward lower mortgage insurance premiums. That’s the money you pay each month to “insure” your loan from default.

In fact, if your home has gained value in the past few years of the housing rebound, you may be able to forgo future mortgage insurance payments altogether by opting out of an FHA refi and applying for a conventional mortgage refinance.

You may qualify for a streamlined mortgage refinance

If your credit score is still mending and your home’s value has been slow to rise, sticking with an FHA refinance may work best for you. If you took out your current mortgage before June 1, 2009, you may also qualify for the FHA Streamline Refinance. That often means you can skip the hassle and expense of a home appraisal — and perhaps even avoid providing a credit report. But each lender has its own loan policies, regardless of FHA guidelines.

VA- and USDA-backed loans also have streamlined refinance programs.

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If you are active or retired military, you’ve earned special mortgage benefits

Active and retired service members gain access to home loan programs backed by the Department of Veterans Affairs. VA mortgages have special benefits like no other, including no down payment and no mortgage insurance requirement. If you qualify, whether your original mortgage was backed by the VA or not, it pays to look into a VA refinance.

However you choose to refinance your government-backed home loan, remember to consider closing costs — in addition to interest rates — before choosing a lender.

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Hal Bundrick is a staff writer at NerdWallet, a personal finance website. Email: [email protected]. Twitter: @halmbundrick

This article was updated Jan. 27, 2016. It originally published Aug. 19, 2015.

Image via iStock.