The FHA Streamline Refinance offers the chance to refinance with very little work. You don’t need income, asset, or credit verification. You don’t even need to re-appraise your home. What you do have to do, though, is pay closing costs. It’s the nature of the beast with any mortgage. Lenders are in business to make money. They make it off the interest they charge and the closing costs they collect. There is the option to secure a no-cost FHA streamline refinance. Does it make sense, though?
What is a No-Cost Loan?
First, let’s look at the no-cost loan and how it works. The name pretty much sums it up. You don’t pay anything for the loan. But names can be deceiving. You are paying for the loan, just in an indirect way. With a loan that has closing costs, you bring money to the closing table. It’s easy to see what the loan costs. On a no-cost loan, you don’t bring anything to the table. But, you likely pay a higher interest rate. It’s harder to measure how much you end up paying for those closing costs in this case.
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How to Decide
Being faced with an FHA streamline loan with $2,500 in closing costs and one with no closing costs, it seems the answer would be easy. It’s not though. The loan with closing costs may have an interest rate of 4%. The loan without the closing costs may have an interest rate of 4.75%. Now how do you decide? We take a look here.
- Ask yourself, what’s your plan? Will you move in the near future? Like within the next 5 years? This plays a role. Usually it doesn’t pay to take the lower interest rate when you won’t be in the home long enough to enjoy the savings. On average, it takes 5 years to recoup closing costs. On a streamline loan, it may take less time because the costs aren’t as high. No matter the case, if you are in the home longer than the 5 years, a higher interest rate may not be the best choice.
- Do you have the money for closing costs? Sometimes closing costs keep borrowers from refinancing. It’s not cheap. If you don’t have several thousand dollars to pay upfront, it may not make sense to refinance. You may have the option to roll the closing costs into the loan, but then you increase the amount you borrow. At some point, the benefit of refinancing becomes lost.
The FHA Streamline Refinance’s Closing Costs
The good news is there aren’t a lot of FHA streamline closing costs to deal with. The loan doesn’t require nearly as much as your original FHA loan. For instance, you don’t need a new appraisal. You also don’t need your credit pulled. The processing of your loan probably won’t take as long as a full FHA loan, either. Each of these factors may result in lower closing costs. Here’s an idea of what the typical costs are:
- Origination or discount points depending on your situation
- Processing (usually lower than regular FHA loans)
- Underwriting (usually lower than regular FHA loans)
- Title services
- Tax service
You also have the option to negotiate the closing costs with your lender. If you don’t want the higher interest rate, consider asking for slightly lower costs. The best way to do this is to shop around. Get a few quotes from different lenders. Then you have more negotiating power.
Banks want your business. If they know they may lose you to a lender down the street, they may be willing to charge fewer fees. Don’t be shy about your ability to shop around. Let lenders know you have other options. This way if they really want your business, they will sacrifice some of the costs in an effort to get your loan. Either way, they make money on the interest payments you make on the loan.
Don’t Forget Your FHA MIP Refund
If you took out your original FHA loan within the last 3 years, you may be eligible for an upfront MIP refund. FHA streamline loans offer a prorated refund of the money you paid if you refinance within 3 years. The refund goes directly towards the money you owe for your new upfront mortgage insurance premium. Right now, the upfront premium equals 1.75% of the loan amount. Let’s look at an example.
Let’s say you took out your original FHA loan 2 years ago. This is your 25th payment. This means you are entitled to 32% of your original upfront MIP back. If your original loan amount was $150,000, you paid $2,625 upfront. You can then receive $840 back. The $840 goes towards the new upfront fee. Let’s say you paid your loan down enough that you owe $140,000. If you don’t wrap any closing costs into this amount, you owe $1610 this time around. That is $2,450 – $840.
Whether you should opt for a no-cost FHA streamline loan is a personal decision. Really think about your plans. If you know you won’t live in the home for more than 5 years, consider the no closing cost loan. If you aren’t sure or you know for sure you will be there longer than 5 years, don’t take the higher interest rate. The loan will cost you more in the end. Your goal should be to pay as little as possible for the loan. This means finding the delicate balance between paying closing costs or keeping your interest rate low. Exhaust all of your options until you find the loan that is just right for you!