This post comes from Keith Gumbinger at partner site HSH.com.
Q: I purchased a home in April 2014 with an FHA loan at 4 percent. I am getting volumes of mail from independent lenders inviting me to apply for a streamline FHA refinance because of the recent reduction of the annual mortgage insurance premium. Are these FHA refinance offers legitimate? Also, if legitimate, is it worth pursuing since I am not sure if we will live in this house for more than 2 to 3 more years?
A: The FHA’s Streamline Refinance Program is real, and so are the benefits. In your case, and relative to your time horizon, the general question is, “Is a refinance worth it?”
Benefits of an FHA Streamline Refinance
In a FHA Streamline Refinance, you home isn’t subject to an appraisal and there is no income, credit score or employment verification. In essence, all you’re doing is swapping in a new interest rate, resetting the loan term and applying the new mortgage insurance premium (MIP) structure.
FHA Streamline Refinance qualifications
That said, there are qualifications that must be met:
- You must be current: You have to have made at least the last three months of payments on time at the time of the refinance.
- There’s a waiting period: You’ll need to wait at least a six months since your current mortgage was originated to refinance.
- No cash-out refinances: You can’t draw out any equity to cover loan costs, so you’ll need to pay those out of pocket.
- No payment increases: The streamline refinance must reduce your mortgage payment by at least 5 percent.
FHA mortgage insurance premiums
June 1, 2009, is an important date when it comes to determining the cost of FHA insurance premiums. Mortgage insurance costs differ for loans endorsed before and after that date.
Because your mortgage was endorsed in 2014, your annual MIP for your new mortgage will be perpetual, meaning the MIP for the vast majority of new FHA loans cannot be canceled. You’ll need an loan-to-value ratio of less than 90 percent when the loan is originated, and even then it will be 11 years before any cancellation can occur.
Your existing loan’s MIP is 1.35 percent of the loan amount each year, while your new loan will have an MIP of 0.85 percent thanks to the recent rule change. That change saves you about $500 per year for each $100,000 of your loan amount.
The FHA’s upfront insurance premium is 1.75 percent of the loan amount for your loan (endorsed after June 1, 2009).