Refinancing an FHA mortgage loan through the streamline refinance program can help you save money and pay off your home quickly. Even when interest rates rise, refinancing your mortgage can still make sense if your original interest rate skewed high and you recently worked to improve your credit. Refinancing can also help you pay off your loan in less time if you switch from a 30-year to a 15-year term.
What is an FHA Streamline Refinance?
The United States Department of Housing and Urban Development (HUD) offers several mortgage products for homeowners nationwide. HUD works with mortgage lenders to provide the FHA streamline refinance program, which allows homeowners to reduce their monthly mortgage payments by acquiring a lower interest rate. Through the streamline process, homeowners can quickly and easily secure a lower interest rate on their FHA mortgage by working with a HUD-approved lender.
FHA Streamline Refinance Program Requirements
Those who refinance their FHA loan can quickly complete the process, as the program does not require the typical set of paperwork that homeowners outside of the program need to refinance their mortgages. Homeowners in good financial standing who meet the following criteria may qualify for streamline refinancing:
- You are refinancing an existing FHA loan that is at least six months old,
- You are not behind on your payments,
- You will benefit from the new loan’s interest rate, mortgage type, or payment term,
- You agree that you will not take out more than $500 of cash from the refinance.
Note that individual approved lenders throughout the country offer FHA loans. These lenders may impose additional rules needed to qualify for a streamline refinance. For this reason, you should check several options before choosing a lender to work with for this program.
Credit vs. Non-credit Streamline Refinance
Borrowers may request what’s known as a “credit” or “non-credit” streamline refinance of their FHA loan. With a credit refinance, the qualification process reviews a borrower’s credit history. If you recently improved your credit score, you may want to request this type of refinancing, which can net you lower rates or loan terms. A non-credit refinance does not include an additional credit review beyond the basic streamline program requirements. Neither of these programs requires a home appraisal.
Benefits of an FHA Streamline refinance
An FHA streamline refinance allows you to restructure your mortgage loan relatively quickly compared to other refinance options. In this way, you can take advantage of better rates, if available, or change the time it takes you to pay off your loan. To speed up the process, you won’t need to provide the same amount of documentation required when you first applied for an FHA loan. The lender also streamlines their underwriting process, further decreaisng the time it takes to approve the new loan.
Costs of a Streamline Refinance
While you can save on the cost of an appraisal using the streamline finance program, lenders may still charge fees to administer the program. Lenders may also offer “no-cost” refinances by charging borrowers a higher interest rate. The additional interest the lender receives then covers the costs of closing the loan.
Ask your lender to disclose any closing costs or fees you’ll need to pay for a streamline refinance before you make a final decision.
FHA Upfront Mortgage Insurance Premium
At closing, FHA loan borrowers must pay an upfront mortgage interest payment (UMIP) of 1.75% of the loan’s balance. This translates into a $1,750 cost for a $100,000 mortgage loan. When refinancing an FHA loan into another FHA loan, the UMIP applies to the new loan as well. However, borrowers may receive a partial refund of the UMIP paid on their original loan if they refinance to another FHA loan within the first thirty-six months of the original closing.
Alternatives to a streamline refinance with an FHA loan
When considering a refinance, look at options beyond the FHA streamline loan. Depending on your home’s equity and your credit score, you may find better alternatives available. The purpose of a refinance isn’t necessarily to complete it quickly; you want to secure a loan that gives you a significant financial benefit. You also want to take advantage of your home’s increase in value through a cash-out refinance.
FHA Cash-out refinance
FHA borrowers who have considered the property they wish to refinance as their primary home for the prior twelve months may request a cash-out refinance option. Expect a more stringent approval process for an FHA cash-out refinance than the streamlined program. When taking cash out, the total amount of the newly refinanced mortgage may not exceed 20% of the home’s value.
If your home has increased in value, you may request a reappraisal to recalculate your current equity amount and determine how much you could receive using a cash-out refinance. You may use the cash for whatever purpose, such as to pay off other, higher-interest rate debt or fund a home renovation project.
Conventional mortgage refinance
If changes in your credit or income now allow you to meet lender guidelines, refinancing to a conventional mortgage could provide additional benefits worth the time required to provide documentation. Check the current interest rates offered on conventional mortgages and ask your lender if you might qualify.
Making extra principal payments
Rising rates or a failure to meet loan qualification requirements could take refinancing off the table at the current time. Consider paying extra monthly principal to bring down your mortgage balance until your circumstances change. This can help to pay off your mortgage faster, which might be one of your goals for refinancing. Look at your monthly budget to determine if you have any money tagged for discretionary spending that can be added to your mortgage payment. FHA loans do not have prepayment penalties, although other mortgage loans might still charge fees for paying off your loan early.
Conclusion
Before you choose to refinance an FHA loan, compare your current interest rate to what lenders can offer. Don’t forget to add fees such as the cost of an upfront mortgage insurance premium and any closing costs into the refinance equation. Under the right circumstances, refinancing can be a smart financial decision to help you pay off your home faster, with less interest.
