FHA streamline refinancing may not be as easy as may have higher costs than anticipated.
Q: I read your recent Real Estate Matters column regarding FHA streamline refinancing. There is one glaring mistake. You wrote “If you have 25 years left to repay your loan, you’ll still have 25 years – you’ll just pay interest at a lower rate for those years.”
This is totally false. When a person does a streamline refinance, the new loan is for whatever the new loan term is, which in most cases is a 30-year mortgage.
Speaking of an FHA streamline refinance, did you know that FHA requires lenders to ascertain that there is a savings of 5 percent between the old and new loan? They not only factor principal and interest but also the cost of mortgage insurance into the equation.
Did you know because of the poor state of FHA’s current finances, the mortgage insurance requirements changed. Previously, the annual fee was .55 percent for mortgage insurance. Now, the annual insurance fee is 1.15 percent.
Homeowners who are paying at the .55 percent rate would need to lower their interest rate substantially (by 2 to 3 percent) for the new loan to make sense. When FHA changed the structure of their mortgage insurance structure, they hurt many existing borrowers in their ability to complete a streamline refinance.
A: Thank you for your comments and for clarifying some of these issues. You are correct that a streamline refinance of an FHA loan would effectively give a borrower a new loan term. The borrower could choose a shorter term for his or her loan, but the monthly loan payment could not go up by much.
There are various other rules that go into a streamline refinance, which is why we always recommend that a borrower talk to a qualified mortgage broker or mortgage lender.
In the article that you mention, the borrower had an interest rate over 5 percent on his loan. He didn’t indicate how large of a loan he had, but given your insight, he might not get a low enough rate to officially “benefit” from refinancing his FHA loan.
It would be prudent for this borrower to seek the assistance of a qualified FHA lender to go over not only the interest rate but also the costs involved in refinancing the loan. Given your information, it appears that his loan payment might go down but the length of his loan would increase by five years.
If his monthly payment savings aren’t high enough, the borrower shouldn’t move forward with the refinancing.