December 17, 2021
If you currently have an FHA mortgage and want to refinance into another FHA loan — consider a streamline rate reduction. With this type of government home loan refinance, you can reduce the interest rate and lower your monthly payment. Let’s look a little deeper at FHA and other types of rate reduction mortgages.
Government Streamline Rate Reductions
Both the FHA and VA have streamlined home loan programs to help their borrowers refinance to a lower interest rate. Depending on your lender and their particular guidelines, you may not need as much paperwork, and the appraisal requirements could be less.
One of the main appeals for VA and FHA loans is that credit guidelines are less strict than conventional loans. So even if your credit score isn’t above 650, there’s a good chance you can still get an excellent interest rate. One stipulation, though, is that you have to be current with your mortgage.
Advantages of Government Home Loans
Here’s a list of the main points borrowers love about government loans
- Less stringent credit guidelines
- When purchasing, low down payment options
- Appealing low-interest rates
- Minimum property guidelines protecting borrowers
So, if you currently have a government mortgage and would like a lower rate, first check out the possibility of a streamline refinance. These are especially good if you’re pressed for time and don’t want to go through the process of an entire refinance.
Unfortunately, there’s no such thing as a conventional streamline refinance . Instead, you can choose from traditional cash-out refinance or rate-and-term. And since these aren’t streamline, the loan process will be as involved as a purchase loan.
FHA Streamline Refinance
For an FHA streamline refi, you have to have an existing FHA mortgage. The US Department of Housing and Urban Development (HUD) has a few basic requirements. These include
- You already have an FHA loan
- The loan has to be current
- There has to be a net tangible benefit to you
- You can’t get more than $500 cash out
For the net tangible benefit, your loan officer will have a form to fill out to see if there’s enough benefit. The same is true for a VA loan. Some lenders offer a no-out-of-pocket refinance. Instead of you having to come up with the money to refinance, they roll the closing costs into the loan.
Keep in mind with an FHA loan, you’ll still have a mortgage insurance premium (MIP). But, getting a streamline rate reduction loan is much faster than going through the entire process of a new mortgage loan.
If you have the time, and your credit score is 650 and above, consider refinancing your FHA loan to a conventional. Dropping off the MIP might save you $100 or more plus whatever you’d save with a lower interest rate.
Is a Streamline Rate Reduction Loan for You?
This type of home loan could be just what you need if:
- You don’t need any cash out
- The lender fees and closing costs are reasonable
- You can reduce your interest rate by at least 1%
- You wouldn’t be able to qualify for a conventional loan
VA Interest Rate Reduction Loan
The VA has a similar refinance product called (IRRRL). Like with an FHA loan, the IRRRL can be faster and require less paperwork than a regular refinance. Many veterans take advantage of the IRRRL because of VA’s low-interest rates.
When refinancing a VA loan, it’s essential to consider the costs, including the lender fees.
Compared to refinancing into a conventional loan, there could be some significant advantages to an IRRRL. These include:
- Low VA Interest Rates — compared to conventional loans, VA usually has the lowest rates. That makes for a lower payment and continuous monthly savings.
- Appraisal Waived — most lenders will waive the appraisal on a VA IRRRL. That saves you time, especially in a hot market where appraisers are booked weeks in advance.
- No Money Out of Pocket — with an IRRRL, any fees, and closing costs can wrap into the loan, so you don't have to come up with any money at closing.
Government Home Loan Pros & Cons
Along with the advantages of government loans, there are a few drawbacks. For example, with FHA, you will have MIP for the life of the loan. But, the low-interest rates and easier credit guidelines can outweigh the mortgage insurance premium requirement.
When it comes to a VA loan, there is the funding fee that can be substantial. But VA rates can be among the best. Plus, the VA doesn’t have a lending limit as long as you qualify financially. Compare loans and costs to find your best deal.
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