Do you want a lower mortgage payment? You can get it with the FHA Streamline loan. You don’t need to verify your income or the value of your home. It can be done quickly and save you money. Some borrowers lower their interest rate. Others save with today’s lower mortgage insurance rates if their loan is from before 2015. Either way, you pay the FHA Streamline closing costs. Here we look at the costs and how you can minimize them.
Understanding the FHA Streamline Costs
Like most other government-backed mortgages, there are limitations regarding what lenders can charge. However, you will find that the closing costs are fairly similar to those of any other loan. Lenders have to cover their costs as well as make a profit. You can expect to pay charges specific to your loan, such as origination fees. These are usually quoted as a percentage of the loan amount. For example, 1 point equals 1 percent.
You will also find standard fees that help get a loan closed. These include underwriting, processing, and credit report fees. Typical title fees usually apply too. Even though you don’t need an appraisal or income verification, any lender will require a title search. The exception to the rule is if you use the same title company. The title examiner may be able to perform a title update rather than a full search. This may save you a few hundred dollars on closing costs. You will also pay a closing fee, tax service fee, and recording fee. Keep in mind, these costs are just the lender’s and title company’s charges. You still have the FHA charges to pay.
The Mortgage Insurance
When you took out your FHA loan originally, you paid upfront mortgage insurance. This is money you don’t see again. It helps fund the FHA’s reserve account. This is the money they use to guarantee FHA loans. Without the reserves, FHA loans would not be available. When you refinance your FHA loan, you will pay the fee again. Currently, this means paying 1.75% of the loan amount at the closing.
You also pay annual mortgage insurance. Currently, this means paying 0.80% of the loan amount. The lender pays the insurance bill for you on an annual basis. However, they collect the fee monthly with your mortgage payment. On a $200,000 loan, this means paying $133 per month.
The Good News
There is good news regarding your upfront mortgage insurance, though. If you took out your original FHA loan less than 3 years ago, you may be eligible for an upfront MIP refund. The amount you receive ranges between 10 and 68%. It depends on how long ago you took out your original FHA loan. In order to qualify for the refund, you must have made at least 6 payments on the loan. After the sixth month, the refund starts at 68% of the amount you paid. Each month it decreases by 2%, ending at the 36th month with a 10% refund. The money directly offsets the new upfront MIP you owe.
Figuring Out Your Loan Amount
The new FHA Streamline Refinance loan amount is strictly monitored. You cannot roll the closing costs into the loan. You must pay them out of pocket or negotiate a no-closing-cost loan. We discuss this in further detail below. The loan amount may only include:
- Outstanding principal balance + new upfront mortgage insurance – mortgage insurance fund = new loan amount
Getting out of the FHA Streamline Closing Costs
So how do you avoid paying FHA Streamline closing costs? You negotiate with the lender. This is possible. Many lenders will pay the closing costs for you. In exchange, they charge a slightly higher interest rate. This means you must have some wiggle room in your payment to negotiate this. One of the stipulations of the loan program is that there is a benefit of refinancing. If your payment does not decrease because you took a higher payment, you won’t get approved. However, if you have room to take a 0.5% higher interest rate, you can save money and avoid paying the closing costs.
Keep in mind, not every lender will take this deal. Many want the fees up front. If this is the case, shop around. There are many FHA-approved lenders throughout the country, many of which will pay the closing costs. Find a bank that will pay the closing costs for you and you won’t have to bring any money to the closing. This makes refinancing even easier because you won’t have to verify your income, home value, or assets!
There may be one loophole, though. Even if the lender pays your closing costs, you may have to set up an escrow account. If the lender already pays your taxes and insurance and there is enough money left to start the new account, you could be safe. However, oftentimes, lenders require borrowers to add at least a 2-month cushion onto their escrow account. This ensures the lender will have enough money to cover your taxes and insurance when they become due and payable. If this is the case, you may have to verify the assets to cover the escrow.
Overall, the FHA Streamline closing costs are reasonable. With the eligibility of the upfront MIP refund, you can make your loan affordable. Even if you pay the closing costs yourself, the money you save each month will quickly help you recapture those fees. If you want to determine if it is worth it for you to pay the closing costs out of pocket, figure out your break-even point. This is when you make up for the closing costs with your monthly savings. Once you pay off the closing costs, the savings goes directly in your pocket. At what point will this happen for you? Determine this point and see how it compares to your future. Do you plan on staying in the home that long? If you do, the refinance may be well worth it as you can save money well into the future even though the refinance cost you money.