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FHA Streamline Refinance offers are real and worth exploring

Keith Gumbinger
FHA Streamline Refinance

Q: I purchased a home in April 2014 with an FHA loan at 4 percent. I am getting solicitations from independent lenders inviting me to apply for a streamline FHA refinance partly because of the reduction of the annual mortgage insurance premium a few years ago. 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 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 need an LTV below 90 percent when the loan is originated, and even then it will be 11 years before any cancellation can occur).

Since 2014, your existing loan's MIP has been 1.35 percent of the loan amount each year, while your new loan will have an MIP of just 0.85 percent thanks to a 2015 annual premium reduction by HUD. That change saves you more than $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 when you took your loan in April 2014 was a little above 4 percent, and is currently about 3 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).

Related: Mortgage Refinance Breakeven Calculator

That said, lenders can offer you a "no-cost" FHA streamline refinance, where your loan costs are incorporated into the interest rate. While this can mean a higher-than-market interest rate than you might otherwise qualify for (and so lesser long-term savings), it does mean that you can start saving money right away, if in smaller increments.

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, but it's always worth the opportunity to review if you can save money on your mortgage.

One last piece of advice: Many lenders will do a FHA streamline refinance, but lenders each have their own rules and overlays, so it’s always best to shop around.

(Image: KLH49/iStock)

Ask the expert
Keith Gumbinger
Keith Gumbinger
Mortgage Expert
Vice President, HSH.com
About Keith: Mortgage market observer and analyst with 35 years experience... (more)
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