Do you worry that refinancing might cost you too much money to do? Maybe you worry about the paperwork or what the lender will ask of you.
We have good news for you if you have an FHA loan. You may be able to refinance with the FHA streamline refinance. Just what is this program and is it right for you? Keep reading to find out.
The FHA Streamline Refinance Defined
First, let’s look at how the FHA refinance works. While it is a refinance, it’s very limited in what it can do. The FHA offers the program to current FHA loan holders that want to lower their interest rate or payment. Some borrowers also use it to refinance out of an ARM and into a fixed rate loan.
Qualifying for the FHA Streamline Refinance
So how do you qualify for this loan?
First, as we said above, you have to have an FHA loan. If you meet that requirement, you must meet the following requirements:
- You must have made at least 6 payments on your current mortgage and 210 days must have passed since your closing
- You must be able to prove that you’ve made all of your mortgage payments on time. If you’ve had the loan for more than 12 months, the lender will need to see 12 timely mortgage payments.
- You must prove that there is a benefit for you to refinance. A benefit could be a lower payment, lower interest rate, or less risky loan term.
This is it – the FHA doesn’t require you to have a certain credit score or certain debt ratio. They also don’t require a new appraisal. The lender can use all of your original qualifying information from your first FHA loan to qualify you for the refinance.
Should You Use the FHA Streamline Refinance?
If you know you qualify for the FHA streamline loan, the next question is, should you use it?
The one obstacle you should consider when deciding if it’s right is the cost. Just like any other loan, you’ll have to pay closing costs. You’ll also have to pay upfront FHA mortgage insurance again. These costs can add up, so you need to make sure that the loan makes sense.
The good news is that you may be able to get a refund of your original upfront FHA MIP. If you obtained your original FHA loan within the last 3 years, you may get a partial refund of the fee you paid. The FHA offers these refunds starting at 6 months after you take out your original FHA loan. The refund at that point starts at 70% of what you paid. From there, it decreases every month until the 36th month, when you would receive 10% of what you paid.
No matter the amount you receive, the lender will deduct it from your new upfront MIP. This can reduce the amount of money it costs you to refinance, but you should still consider the total cost. We like to figure out the break-even point to see if it makes sense. This is the point when your closing costs are paid off and you can enjoy the savings of the new mortgage.
You can determine your break-even point with the following equation:
Total closing costs/Monthly savings on new mortgage = Break-even Point
Let’s say your break-even point is 72 months or 6 years. If you know you won’t be in the home in the next 6 years, it doesn’t make sense to refinance. If, however, you will be in the home, you stand to save money and it may make sense to do so.
What’s Your Purpose in Refinancing?
Finally, you should consider your purpose in refinancing. Do you need cash? If so, the FHA streamline refinance isn’t the right choice. You can only refinance the outstanding principal balance plus any closing costs or upfront mortgage insurance.
Are you just trying to get a more affordable payment or maybe decrease the amount of interest you pay? Then the FHA streamline refinance could be a good option. But, you should consider the term. How many years have you already paid on your original term? Will you be resetting the term and adding years back onto your mortgage? It makes more sense to take a new term that is close to the number of years you had left on your original loan. This helps keep your interest costs down and keeps you on target for owning your home free and clear.
Take all of these points into consideration when determining if the FHA streamline refinance is right for you. Don’t make the mistake of refinancing just because you can. Look at the big picture. How does the refinance affect your finances over the whole term? Only then can you decide if it’s right for you.