Q: I purchased a home in April 2014 with an FHA loan at 4 percent. I am getting volumes of mail from independent lenders inviting me to apply for a streamline FHA refinance because of the recent reduction of the annual mortgage insurance premium. Are these FHA refinance offers legitimate? Also, if legitimate, is it worth pursuing since I am not sure if we will live in this house for more than 2 to 3 more years?
A: FHA Streamline Refinancing is real, and so are the benefits. In your case, and relative to your time horizon, the general question is, "is a refinance worth it"?
Benefits of an FHA Streamline Refinance
In a FHA streamline refinance transaction, you home isn't subject to an appraisal and there is no income, credit score or employment verification. In essence, all you're doing is swapping in a new interest rate, resetting the loan term and applying new the new mortgage insurance premium (MIP) structure.
FHA Streamline Refinance qualifications
That said, there are qualifications which must be met:
- You must be current: You have to have made at least the last three months of payments on time at the time of the refinance
- There’s a waiting period: You'll need to wait at least a six months since your current mortgage was originated to refinance
- No cash-out refinances: You can't draw out any equity to cover loan costs, so you'll need to pay those out of pocket
- No payment increases: The streamline refinance must reduce your mortgage payment by at least 5 percent
FHA mortgage insurance premiums
June 1, 2009 is an important date when it comes to determining the cost of FHA insurance premiums. Mortgage insurance costs differ for loans endorsed before and after that date.
Since your mortgage was endorsed in 2014, your annual MIP for your new mortgage will be perpetual -- the MIP for the vast majority of new FHA loans cannot be canceled (you'll need an LTV below 90 percent when the loan is originated, and even then it will be 11 years before any cancellation can occur).
Your existing loan's MIP is 1.35 percent of the loan amount each year, while your new loan will have an MIP of just 0.85 percent thanks to the recent rule change. That change saves you about $500 per year for each $100,000 of your loan amount.
The FHA’s upfront insurance premium is 1.75 percent of the loan amount for your loan (endorsed after June 1, 2009).
FHA mortgage rates
FHA mortgage rates have been substantially lower than conventional mortgage rates in recent years, adding to the list of the program's benefits. Given when you took out your loan, you will probably be able to improve your interest rate somewhat -- the average interest rate for 30-year FHA-backed mortgages in April 2014 was a little above 4 percent, and is currently about 3.60 percent.
Is a FHA refinance worth it?
You'll need to run the numbers. Since it will cost you money to refinance, you'll need to determine the difference between the payments on your existing loan and the new loan, and divide this into the expected amount of your closing costs (check your existing HUD-1 closing statement for the best estimate). This will determine your break-even point (the date when you have recovered your outlays and will begin to actually save some money as a result of your effort).
Odds are that with a short time frame (2 to 3 years in your case) you might be able to get back to breakeven. If all you will do is get back to zero in the end, there's little reason to bother with all the time and expense of the refinance transaction.
One last piece of advice: Many lenders will do a streamline refinance, but lenders each have their own rules and overlays, so it’s always best to shop around.
A 30-year expert observer of the mortgage and consumer debt markets, Keith Gumbinger has been cited in thousands of articles covering a wide range of consumer finance and economic topics in outlets ranging from the Wall Street Journal to the Bottom Line newsletters. He has been a featured guest on national broadcasts for CNN, CNBC, ABC, CBS and NBC television networks and has been heard on NPR and other national and local radio programs. Keith is the primary researcher and writer for HSH.com's MarketTrends newsletter and has authored or co-authored a number of consumer guides on mortgages, home equity, refinancing and more.
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