The FHA streamline refinance lets you refinance your current FHA loan without all of the paperwork. You don’t have to prove that you have a certain credit score or that your debt ratio is a certain number. The FHA allows lenders to use the original qualifying factors to approve borrowers for this loan. However, just because you can skip out on the verifications for the loan, it doesn’t mean you don’t pay PMI. The FHA calls it Mortgage Insurance and everyone pays it for the life of their FHA loan.
What is the FHA PMI?
You’ll actually pay the FHA PMI two ways – one at the closing and the other on a monthly basis. The FHA charges this premium in exchange for their flexible guidelines. Originally, you were able to secure an FHA loan with a credit score as low as 580 and debt ratios as high as 31/43. Now with the streamline refinance, you don’t even have to verify any of these items, so it makes sense why you have to pay insurance.
The Upfront Mortgage Insurance
The one thing that is different with the FHA streamline refinance is how you pay the upfront mortgage insurance. The FHA offers you a refund of the insurance you already paid if you refinance within 3 years of taking out the original FHA loan.
This gives you the chance to pay a little less out of pocket when you secure the streamline refinance loan. You’ll receive the refund in the form of a credit that the lender will use towards the new upfront mortgage premium.
Just how much you receive depends on how long you’ve had your FHA loan. You cannot refinance with the streamline program until you have made at least six payments on your original loan. The most you can receive for your refund, then is 70% of what you paid. After that sixth month, the refund amount decreases 2% until you get to the 36th month, when you can receive 10% of your upfront MIP back.
Here’s how it works. Let’s say you paid $3,000 for upfront MIP on the FHA loan you took out 12 months ago. Now you are going to refinance with the streamline program. You are eligible to receive 58% of what you paid back, that equals $1,740. On your new loan, the upfront MIP total is $2,800 since you paid down some of the principal. You will only have to pay $1,060 out of your own pocket, though.
The Annual Mortgage Insurance
Once you pay the upfront MIP, unfortunately, you are not done. You’ll also pay annual mortgage insurance. The name is deceiving, though, since you actually pay it monthly. Your lender pays the annual amount on your behalf and then charges you 1/12th of the amount every month.
In the case of the annual MIP, everyone pays the same rate – 0.85% of their loan amount. The lender starts calculating your monthly amount based on the full principal balance of your loan. In this case, we have a $160,000 loan, so you would owe $1,360 for the first year, or $113 per month.
The amount of PMI that you pay each passing year will decrease, though. It’s based on the amount of your outstanding mortgage. If you don’t make extra payments, the principal won’t fall that much initially, so you’ll only see a small drop in your mortgage insurance at first. As you get later in the term, though, the insurance should start dropping as you pay that principal down more and more.
FHA insurance is often more expensive than the PMI on conventional loans. A part of it is due to the upfront MIP you must pay to even get the loan. Regardless, though, it’s a great loan program that helps borrowers with less than perfect credit get the loan they need to buy their home.