If you have a Utah Housing Loan, then you carry two mortgages: a first mortgage (in most cases an FHA loan) and a second mortgage that covered your down payment requirement.
Utah Housing Loans are great loans to start with, but extremely difficult to refinance out of. And there is a reason for it: Utah Housing wants you to keep paying the high interest on that first mortgage, and uses the second mortgage as a rope to tie you down.
Here is how it works.
The easiest, fastest and best refinances are called streamlines – they don’t penalize you for your credit rating, they don’t require proof of income, and they don’t care if your home value is underwater. But streamline refinances such as the FHA Streamline will only refinance your FHA loan – which is the first mortgage. The second mortgage can stay in place as long as it agrees to subordinate to the first. And this is where Utah Housing says “naah!”
Utah Housing has no incentive to subordinate the second because it is collecting interest from both mortgages – and the bigger chunk comes from the primary loan. Most of the times they have you right where they want you. Refinancing both mortgages with a different lender is usually a challenge because of the lack of required equity (since you didn’t actually make a down payment, and home values have been slow to rise in the past few years).
So how do you go about refinancing your Utah Housing FHA Loan?
The easiest choice would obviously be to pay off the second mortgage and take it out of play. But not everyone has a few thousand dollars just lying around in their bank account. So you’re left with two other options:
1. Talk to your local credit union about refinancing your second mortgage with them. Both America First Credit Union and Mountain America Credit Union offer home equity lines of credit up to 100% of your home value, at a probably lower rate than what you have now. Best of all, they will play nice and agree to subordinate when I get your FHA Streamline Refinance going.
2. Consider a Conventional Refinance if you believe you have at least 5% equity in your home. An appraisal of the property will be required and your credit history and debts will be considered. The idea is to consolidate the two mortgages in one, with a maximum loan to value of 95% (meaning the new appraisal will have to prove the existence of at least 5% equity). Such a high LTV is allowed because your second mortgage was acquired at the same time with the first – it is called a “purchase money second”. The refinance is considered a rate-and-term refinance, and not a cash-out (which would require a maximum LTV of 85%). Still with me?
Let’s run some numbers so that you can better understand each option:
Assume you have an FHA Utah Housing first mortgage of $140,000 at 6% interest, and a $7,000 second mortgage to go with it.
Your home is currently worth $155,000, which puts you at 95% loan to value (LTV).
- If your FHA Utah Housing Loan was endorsed on or before May 31st 2009, most likely an FHA streamline would work best. Your low FHA mortgage insurance payment would stay the same (probably around $70), and your interest would drop to about 3.375%.
- If your FHA Utah Housing Loan was endorsed after May 31st 2009, you will have to pay a new FHA up front mortgage insurance fee of 1.75% of your loan balance ($2,450), and your annual FHA mortgage insurance will be about 0.85% of your loan amount ($1,190 divided by 12 months = $99.16). Both your interest rate and mortgage insurance premium go down – just make sure you won’t be charged out of pocket closing costs. Otherwise, consider the Conventional Refinance below.
- Get an appraisal done, provide income documentation, and refinance both mortgages into a single Conventional Loan at an interest rate something like 3.75%. The FHA mortgage insurance is replaced by the Private Mortgage Insurance. The better your credit score, the lower the insurance. For example, a 720 credit score translates into a monthly insurance payment of $88.20, while a credit score of 680 would cost you $127.40/month (source: Radian PMI Calculator). Both payments are below the cost of the FHA mortgage insurance above, translating into double savings.
Do you hear the Ca-Ching?? Stop giving away your hard earned money, and put Utah Housing on the naughty list this year.
Call me at (801) 473-3154 to assess your options. Complimentary gift suggestions provided if you have trouble spending your refinance savings this season 😉
Apply now to get started.
* Interest rates mentioned in this post are not guaranteed and do not take into account the APR. They are only used to portrait an approximate picture of the current market conditions.