Is it time to refinance your Federal Housing Administration (FHA) loan for a better rate or different term? It doesn’t get any easier than an FHA streamline refinance. Learn all about this simple refi and why you may – or may not – want to do it.
The FHA streamline rate reduction program is a simple way to refinance your current FHA loan for a new one. It’s an opportunity to lower your rate, change terms, or switch from an adjustable rate mortgage to a fixed rate. Lenders can use information gathered during your original FHA loan application to approve the refi, making the process faster and easier than it often is with other mortgages.
As we’ll detail below, there are several distinct benefits to an FHA streamline. But the primary benefit is just as the name suggests: Folks often choose an FHA streamline to refinance their mortgage at a lower interest rate. In fact, it’s common for a lender to approve a streamline only if the rate is reduced by at least .05 percent. In addition, an FHA streamline refinance can help you increase the loan term from 15 years to 30 years to reduce monthly payments or change from an adjustable rate to a fixed rate.
Quick note: An FHA streamline allows you to cash out up to $500. If you’re interested in tapping into equity during a refinance, consider a cash-out instead.
An FHA streamline offers many benefits that can help you lower your monthly payments, simplify your life, and more. Let’s look at a few of them.
Most refinances require a lot of paperwork from both the borrower and the lender. That includes gathering financial records as well as filling out all the necessary application documents to process the new mortgage. Not the case with a streamline. Your lender will use the information from your FHA purchase loan to fulfill many of the financial requirements for the refi, including your income records and appraisal.
The goal of a rate-and-term refinance is to replace your current mortgage with one that is better for you financially. Often, that means a lower interest rate. Because they are government-backed, FHA loans usually offer better rates than conventional options can.
Are you worried about having your credit pulled – again? With an FHA streamline, you may not have to. There are two types of FHA streamlines:
- Credit Qualifying FHA Streamline Refinance – Requires a credit check and analysis, but not an appraisal
- Non-Credit Qualifying FHA Streamline Refinance – Doesn’t require a credit check or an appraisal
An FHA streamline with no credit check is most common, but there could be advantages to having an updated credit report. For example: If your credit score has improved since your original loan, you may be offered a lower interest rate. Plus, if you’re adding or removing a co-borrower to the loan, a fresh credit check may be required. Your lender will tell you which option(s) you have.
If you’re thinking, “Sounds great, how do I apply?” – then take a minute to see if you might qualify. You may be eligible if you meet the following FHA streamline requirements:
The FHA IRRRL program is exclusively available for current FHA loan borrowers.
The biggest indication of whether you can afford the new loan payments is if you’ve consistently paid your current mortgage. To qualify for an FHA streamline, your payments must be up to date. Any more than one late payment in the last 12 months will be a red flag.
A lender must see there is a “net tangible benefit” to approve your streamline. That means you’re not just applying for the sake of changing things up – and a lower interest rate alone, for example, doesn’t guarantee you’ll save money over the life of the new loan compared with your current one. Typically, a net tangible benefit is determined when a loan either saves you money or gets you out of a riskier loan.
It may be disappointing to learn that you won’t leave mortgage insurance behind after refinancing with an FHA streamline. Just like your purchase loan, it will require two types of mortgage insurance premium (MIP):
- Upfront mortgage insurance premium (UFMIP) – 1.75 percent of the loan amount; either paid at closing or rolled into your loan
- Monthly mortgage insurance premium (MIP) – 0.15 to 0.75 percent of the loan amount calculated annually and split into monthly installments
It’s a pretty common misconception that MIP makes FHA loans less affordable. In reality, MIP is what makes home buying affordable for those with limited savings or unfavorable credit history.
Closing costs are also part of the equation, covering fees and prepaid costs (like interest and insurance) associated with the loan.
Normally, closing costs can run 2 to 5 percent of the purchase price.
If you’d like to pay less up front, ask your lender about rolling closing costs into the loan. They may even offer a “no cost” FHA streamline refinance option, where you pay nothing out of pocket. The trade-off is that you’ll pay a higher interest rate – but it may be worth the extra cost if you’re still receiving a net benefit from refinancing.
Your lender has established a net tangible benefit to the refinance, but does that mean you should do it?
Before signing on the dotted line, take time to think it through. Lower monthly payments don’t always mean you’ll come out ahead – especially if you plan to sell your home in the near future. Review your loan estimate and calculate how long it will take to break even on the loan.
If you’ve built up your credit score and home equity, it may be a better option to use a conventional refinance and eliminate MIP.