Finally, a Life Raft to Homeowners Underwater

August 30, 2012

By Nicole Mayer:

If you have an FHA home loan, but don’t have the equity; credit; or income to refinance and save money, the FHA Streamline Refinance Program may be your new best friend.  It could save you hundreds of dollars each month on your mortgage payment.

And if your current FHA loan was endorsed on or before May 31, 2009, your savings could be greatly increased, thanks to a recent change in FHA mortgage insurance premiums.

FHA streamline refinancing has been available since the early 1980s but given the drop in interest rates over the past few years, and changes in FHA mortgage insurance rates, the savings for homeowners are potentially huge.

To be eligible for an FHA streamline refinance loan, there are some requirements.  You must have an FHA loan on which you have made at least six payments.  You must have no late payments during the 12 months preceding your refinance.  Additionally, the terms of your new FHA streamline refinance loan must result in a monthly payment that is at least 5% less than what you currently pay each month or you must be refinancing from an Adjustable Rate Mortgage to a fixed rate mortgage.  This is called a “net tangible benefit.”

More Bang for Your Buck

Here is a breakdown of the benefits of an FHA streamline refinance loan.

  • Benefit 1 – Reduced Interest Rate

Between 2001 and 2009, the average interest rate on FHA mortgage loans was 6.05%.  Since 2010, the average interest rate has dropped to 4.36%.

On a $200,000 loan, the difference between shedding the old average rate and getting the new average rate, could save you 1.69%, which equates to $281 per month on your mortgage payment.  With the average rate running at 3.95% for the past four months, someone who took an FHA loan when rates were at their highest, could be looking at saving $450 each month!

  • Benefit 2 – No Required Appraisal, Credit Check or Income Verification

Perhaps one of the best things about the FHA streamline refinance program is that you can be eligible to refinance at a lower interest rate, even if you owe more on your home than it is worth.  Additionally, depending on the lender you choose, you may not even have to prove that you have good credit or a satisfactory income.

While at first this may conjure up images of subprime lending, to get an FHA streamline refinance, the borrower must have made at least six payments on their current FHA mortgage, must not have made a late mortgage payment within the past 12 months, and, there is no option to take cash out.

The idea behind this is that if you have been able to make your current (higher) mortgage payment on time for the past 12 months, your home value, credit, and income should be sufficient to meet an even lower mortgage payment going forward.

  • Benefit 3 – Less Hassle, Lower Fees

Lenders who offer FHA streamline refinance loans without appraisal requirements, credit checks or income verifications, can save you time and money that would otherwise be spent on the fees associated with obtaining and analyzing these items in the underwriting process.

Those savings are passed on to you, in some instances, with no out-of-pocket expenses for the refinance.  Of course, if you choose to go the no-cost route, you will not get the lowest rates available (you didn’t expect them to give up all of their profits did you?) but you can score a hefty savings whether you go the no-cost route or opt to pay some closing fees.

The Mortgage Insurance Twist

**Click here for a chart which shows the history of FHA mortgage insurance rates.

FHA borrowers looking to refinance need to pay close attention to how changes to FHA mortgage insurance rates will impact their monthly loan payments and closing costs.  With some exceptions, generally FHA loans require payment of an upfront mortgage insurance payment and a monthly mortgage insurance payment.  These rates change from time-to-time.

Upfront mortgage insurance payments, paid at closing or worked into the cost of the loan, have within the last ten years ranged from a lump sum charge of between 1% and 2.25%.  The current rate for upfront FHA mortgage insurance is 1.75%. This means that right now, taking out a new $200,000 FHA loan or refinancing a $200,000 FHA loan would result in an upfront mortgage insurance payment of $3,500.

Annual mortgage insurance, which is paid monthly, has seen rates in the past ten years from a low of.50% of the loan to a high of 1.25%, which is currently in place.  On a $200,000 loan, this results in a monthly mortgage insurance payment of $208.33 ($200,000 x 1.25%  / 12).

Lucky Break for Many on Insurance

If your current FHA loan was endorsed on or before May 31, 2009, then you are in luck!  You stand to save even more money from doing an FHA streamline refinance. This is thanks to price cuts in mortgage insurance rates for these borrowers that were announced in March of this year and became available to those who did a streamline refinance after June 11, 2012.

These are the lowest FHA mortgage insurance rates offered in at least a decade.  The purpose is to entice homeowners to refinance  to lower their payments, so more people can save their homes. Without this incentive current mortgage insurance rates could make refinancing less attractive.

Based on the new special rates, instead of paying the 1.75% upfront mortgage insurance payment, you only pay .01%!  On a $200,000 loan, that’s just $20 instead of $3,500!  And instead of paying 1.25% of the loan annually, you will only pay .55%.  On a $200,000 loan, this means the monthly mortgage payment is just $91.66 instead of $208.33!

The government estimates that 3.4 million households have loans endorsed on or before May 31, 2009.  Keep in mind that your closing date is not the date your FHA loan was endorsed.  To find out when your FHA loan was endorsed, you can call the FHA Resource Center at 800-225-5342 weekdays from 8:00 a.m. to 8:00 p.m. Eastern time.

Even Loans Endorsed After May 31, 2009 Could Benefit

While refinancing an FHA loan endorsed on or after June 1, 2009, could lead to significantly higher mortgage insurance rates, you still can save money in the long run.   Scoring a lower monthly mortgage payment is still possible due to lower interest rates.

To see how FHA mortgage insurance rates have changed over time, and to calculate whether the changes impact your decision to pursue an FHA streamline refinance, you can use a chart we created.  Click here to see the chart which uses the information contained in past HUD loan letters.  These letters reflect the various FHA mortgage insurance rates charged over time.

Using our chart, you can determine what your current mortgage insurance rates are and how they would change under an FHA streamline refinance.

Not All FHA Streamline Loans are Created Equal

While the FHA streamline refinance program was designed to make it easier for homeowners to get lower mortgage payments, you still may encounter a lot of red tape in order to get the lowest interest rates.

The FHA streamline refinance program does not require proof of income and a credit check.  But, lenders are allowed to require such information if they choose to do so.  Many lenders, offering the lowest rates and fees on FHA streamlines, will require you to provide everything required to obtain a conventional (non-FHA) loan, and sometimes even more.  This means a credit check, proof of income, proof of funds in bank accounts, among other items that may vary depending on the lender.

While this makes for a lot of paperwork on your end, it may be worth the savings you can get if you have good credit and a good income.  Some lenders offering FHA streamline refinance adjustable rate mortgage loans have rates as low as 2.75%!

Timing, Timing, Timing

One other helpful tip to keep in mind is that when you refinance, FHA loans require that you pay interest for the entire month in which you close.  This means that if you close on the second of the month, you will have to pay interest for the additional 28 days in that month.  So, to save money you should try to close at the end of the month .

I Did it & You Can Too!

I originally took my FHA loan in 2008 with an interest rate of 5.5%.  A few months ago, after hearing some things about the FHA streamline refinance program, I looked into refinancing.

I chose to go with a lender that required a credit check and income verification due to the incredibly low rate and no-cost options available.  After a few months of jumping through hoops to get the lender my proper paperwork, I was able to lower my mortgage payment by 25% a month!

Empowering yourself as a knowledgeable consumer starts with taking action.  If you are sick of paying a high mortgage payment, get online or on the phone and start researching your options.  You may end up being very happy you did!