The FHA Streamline loan offers many benefits. Not only can you refinance to lower your interest rate, but you can also do it without very much verification. The FHA does not require you to verify your income, the value of your home, or even your credit score. It almost sounds too good to be true! All you have to provide is proof of timely mortgage payments over the last 12 months. It sounds perfect, right? Before you jump in headfirst, there are a few things you should consider. First and foremost – you must determine if an FHA Streamline is worth it. Believe it or not, it is not always the right choice for every borrower.
What Does it Cost?
First, consider the cost of the refinance. No refinance comes cheap. You have to pay the lender and any other 3rd parties involved in the process. The most common costs include:
- Document preparation
- Tax service
- Appraisal (if needed)
- Origination points
- Discount points
The list could honestly go on for much longer. However, these are the most common costs. These add up, making refinancing quite an investment. You could expect to pay between 2 and 5% of the loan amount in closing fees. This should be a consideration when entering if the FHA Streamline is worth it.
What About Mortgage Insurance?
Next you should concern yourself with the mortgage insurance you have to pay. Once again, you will pay the upfront mortgage insurance and annual mortgage insurance. The upfront insurance should be your concern for this issue. When you took out your FHA loan, chances are you paid around 1.75% of the loan amount. On a $200,000 loan, this equals $3,500. That’s no small change! When you refinance, you get to pay it all over again. You probably won’t still owe $200,000, but since you can refinance within 6 months, you may owe close to it. For argument’s sake let’s say you owe $195,000. This means you will pay $3412.50 this time around.
There is some good news! You may be eligible for an FHA upfront MIP refund. This starts 6 months after you originate your loan. It gives you a prorated refund of the MIP you paid. It starts at 70% during the 6th month and goes down to 10% at the 36th month. This means if you refinance within the 6 to 36 month range, you would save between $350 and $2450. This amount comes directly off of the new upfront MIP you owe. This helps make the FHA Streamline more affordable and serves as incentive to use the program.
What are Your Plans?
Next, you must determine your plans. How long will you stay in the home? This plays a factor in your decision. For example, if you know you will move in 5 years, you will use that as your determining factor when deciding if a refinance is right. Even if you do not quite know yet, give it your best guess. We will use this figure in the next few segments.
How Much Will you Save?
The big question is how much will you save? Take a look at the Loan Estimate provided to you by the lender to see what your new payment would be. Determine how much lower that payment is than your current payment. This is your monthly savings. You will use this number when you figure out if refinancing is worth it.
Determine Your Recapture Period
Lastly, you need to determine your recapture period. This is the time it takes you to start reaping the savings from the refinance. Remember when we talked above about the closing costs? These costs take away from your savings. The recapture period is the time it takes to pay back those costs. For example, if you save $150 per month on the new mortgage and the closing costs are $3,500, it would take you 24 months to recapture the savings. Now think back to your plans. Do you plan on staying in the home for at least that long? If not, it does not make sense to refinance.
The Bottom Line
What if you find that your recapture period is too long but you feel like you need to refinance? You can still do it, just keep what it will cost in mind. There are certain situations when it just makes sense to refinance with or without the recapture period. For instance, if you have an adjustable rate loan and it is about to adjust, it makes sense to refinance. If you do not have the capability of handling fluctuating payments, you may just feel better refinancing. Another instance is a borrower who needs the lower payment to make ends meet. It might cost a little up front, but if the savings help, then that is what he should do
If this is the case for you, just try to shop around and find the best deal. There are many FHA lenders out there that offer the FHA Streamline loan. Apply with several lenders within a few week period. Each lender you apply with must provide you with a Loan Estimate. This estimate will show you the cost of the loan. It will also show you the interest rate. Obviously, the lower the interest rate and the lower the closing costs, the more sense the loan makes.
Before you determine if the FHA Streamline is right for you, figure out your goal. Is it to get out of an adjustable rate mortgage or do you want to save money on your fixed rate mortgage? If your goal is strictly to save, then you must find a way to make the recapture period work. This may mean waiting until interest rates drop or until you find a lender with lower fees. Whatever the case may be, take the process slow so you can maximize the benefits of using the FHA Streamline.