Refinance a Mortgage: FHA Home Loan Pros and Cons

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An FHA home loan refinance offers borrowers many advantages over traditional loans. With the FHA behind a loan, you can get a government insured loan with increased qualification flexibility. While borrowers can often find beneficial loan programs for refinancing with the FHA, they do have some drawbacks, as well, so it is important to weigh them carefully.


  • No prepayment penalties - With an FHA loan, there are no prepayment penalties. Therefore, if you decide to sell the house or refinance at a later date, you will not be charged any major fees like you are with other types of mortgages. 
  • Assumable loans - Another great feature of FHA loans is that they are assumable. Therefore, if you decide that you want to sell your house, you could use an assumable loan as a marketing feature. This can attract many different buyers to your house and help you sell it faster. 
  • Higher approval rate - When you apply for an FHA loan, you stand a much better chance of being approved. The approval rate for an FHA loan is higher than the rates for regular mortgages. Therefore, more applicants have access to home ownership than with any other type of program. Even if you have less-than-perfect credit, you can still be approved for an FHA loan.


  • Maximum loan amounts - Depending on where you live, FHA loan programs have a maximum loan amount that they will offer. Therefore, if you have a large house or live in an area with high real estate values, this program might not be for you. With a large loan balance, you will have to find another mortgage lender for your refinance needs. 
  • Upfront mortgage insurance premium - When the government is backing up your loan, they require you to pay a large upfront fee for the mortgage insurance premium. This fee is part of the closing costs and can add up to a large amount of money. Although you can usually lump this into the body of the loan, it is still more money that you have to pay. 
  • Higher interest rates - While the interest rate for FHA loans is good for those with less-than-perfect credit, it is not as great for those with good credit. If you have a great credit score, you can go out into the open market and find lower interest rates with a traditional lender. The traditional lender might have fewer restrictions and rules to go with the loan, as well. If you have good credit, FHA loans may not be to your advantage.