What is an FHA Streamline Refinance?
An FHA streamline refinance loan is a type of home refinancing loan guaranteed by the Federal Housing Administration (FHA). FHA streamline refinancing loans are only available to those with existing FHA loans. They are used when interest rates have had a significant decrease sometime after the borrower has taken a fixed rate loan. The FHA already insures a loan for the borrower, so they will insure a new loan of the same size if it has a better rate, since lower rates increase the chances that the borrower will successfully repay the loan. Since the borrower had already been approved, a lot of the approval process can be skipped, such as home appraisal, and credit approval.
FHA streamline refinance loans use today’s interest rates, which currently range from around 3.5% to 5% per year. However, despite the simplification of the process FHA streamline loans still have most of the same fees associated with getting an FHA loan. Most significant of these fees is the cost of insuring the loan, which is an upfront payment of 1.75%. Afterward, you pay an annual insurance fee of between .45% and .85%. Unlike other refinancing loans, these fees cannot be added to the total of the new FHA loan. Instead, the borrower needs to either pay for these fees out of their savings or negotiate to have these fees waived in exchange for a moderate increase in the interest rates. The total cost of the new loan must, as a rule, be lower than the cost of the original FHA loan. Your rates are partially dependent on the way you restructure your loan, you can choose between a fixed-rate loan which can have a 15, 20, 25, or 30-year term, or you can get a 5-year adjustable rate mortgage (ARM). The lowest rates a typically found with the 5-year ARMs, partly because shorter-term loans present less risk to the lender. For the same reason, the longer termed fixed-rate loans tend to have higher costs than the shorter term ones.
Unlike most refinancing loans FHA streamline refinance loans do not need to do credit checks. This is because the original loan had already been approved when the original was applied for, so lenders take the data from that original approval and apply it to today’s standards to find new rates. A similar line of reasoning also lets the lender avoid doing another home appraisal or checking debt-to-income ratios. However, there are some other requirements which the borrower needs to qualify for FHA streamline refinancing. The loan that is being refinanced must be an FHA loan. The loan you are refinancing must be at least 210 days old. Also, there must be a net gain (savings from the new interest rate - the fees associated with the new loan) of a certain size (depending on various factors). You also have to meet some reasonably lenient requirements for your previous loan payment history. You must have no outstanding mortgage payments at the time you apply for refinancing. You must have paid your mortgage on time for the last six months, and you must not have been late for paying your mortgage more than once during the past year.
Pros and Cons
lower rates: This is the primary reason most borrowers refinance. If interest rates were significantly higher when you took out the original loan than they are today, then you can make some notable savings.
Relatively simple: Compared to most refinancing options the FHA streamline refinance loan has much less paperwork and a much higher chance of approval.
Allows borrower to restructure the loan: If your income is higher than it was when you took out your first FHA loan, then you might consider restructuring your loan with higher payments but lower interest rates.
Mortgage Insurance: When you refinance your FHA loan, you have to pay your upfront insurance costs again. This will 1.5% of the balance of the loan. While the total savings from the interest will save you overall (it is a requirement of the FHA streamline refinance loans that it does), the upfront cost may be difficult if you do not have much liquidity.
Closing costs: This is a disadvantage for similar reasons as the upfront mortgage insurance is. Overall the closing costs will cost you less than you save with the decreased interest rates, but typically these closing costs are up front and out of pocket. If you do not have the liquidity to pay the closing costs upfront than you can pay for them by increasing your interest payment, but that reduces the benefits of refinancing.
Should I Refinance?
The decision to refinance is dependent on a few factors. The questions you should ask yourself are: “how much can I save long-term by refinancing my loan?” and “how comfortably can deal with the short-term costs of the insurance and closing payments?” If the interest rates are drastically lower now than they were when you took out your loan, and you can comfortably pay the fees, then refinancing is likely the best option. If refinancing only represents marginal savings in the long-term and the fees would put a real strain on you in the short term, then it may be worthwhile postponing until there’s a better opportunity.
No Cash Out FHA Refinance
FHA streamline refinances loans differ from most other refinancing loans, in that they are not allowed to increase in size from the original loan by more than $500. This is what is meant by “no cash out.” They are structured this way so that the insurer (the FHA) is responsible for no additional costs if the borrower defaults.
203k FHA Refinance
You can even refinance your existing FHA loan into a 203K loan. This could be really useful if your home is in need of repairs or renovations, and you've yet to pay off your FHA loan. You can simply turn your old FHA loan into a new one that will provide you with the financing you need for renovations.
As we said earlier, the benefits of refinancing your FHA loan are generally part of a long-term plan. Life is full of changes, and it's important to keep on top of your finances to make sure they're changing with you, and for the better. Luckily, there are lots of options for refinancing your FHA loan to make sure you get the most out of your investment.