The FHA Streamline Refinance Program has existed since the early 1980's but lately has been getting a lot more attention from savvy homeowners who want to save money on their existing FHA insured mortgages.
FHA Mortgage Primer
The Federal Housing Administration (FHA) is the largest mortgage insurance provider in the US. FHA approved lenders take less risk on their mortgage loans because:
- loans have to meet specific minimum FHA criteria to qualify
- if the homeowner defaults on the loan, FHA will pay a claim to the mortgage lender
- cost of this mortgage insurance is included in the monthly payment
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borrower pays this mortgage insurance until either 5 years pass or there is 78% equity in the home, whichever takes longer to achieve
Streamline Refinance
Your mortgage loan has to be backed by FHA to be eligible for this type of refinance. If you are not sure, or don't remember what kind of loan you have you can either read your mortgage or deed of trust paperwork or you can contact your mortgage lender to ask them.
"Streamline" refers to the refinance process, which requires much less documentation than your original loan did and although there will be closing costs they should be lower than your original costs. Three other things you should know about a streamline refinance are:
- You have to be current on your mortgage payments at the time you make the refinance application. Some lenders may require that you were current for at least the previous 12 months.
- The purpose of the refinance is to lower your interest rate, and therefore your monthly principal and interest payments
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You may only refinance the exact amount of principal left on your mortgage
Cashing Out
With an FHA Streamline Refinance you may not "cash out" any equity in your home, say to pay for your daughter's college tuition. However, if your home has enough equity and you need to get a new roof and windows, you might want to talk to your lender about an FHA Streamline 203K Refinance Loan.
With this type of loan you can borrow up to $35,000 more for the purpose of a remodel or improvement that does not drastically alter the home.
- You can't use the money to fund a do-it-yourself home improvement project. You have to hire at least one FHA approved contractor to do the work. Some exceptions can be made for homeowners who can prove they have the expertise to complete the project.
- The contractor has to give you a detailed written estimate that covers all aspects of the project and they have to agree in writing to do the entire job for the estimated price. You are responsible to obtain all necessary permits.
Closing Costs
Your lender will charge you closing costs to refinance your loan, and you will usually have three choices for payment:
- You may pay the closing costs up front. Closing costs will vary by lender, and possibly by state but you can estimate two to three percent of the value of the loan for your closing costs. If you can afford to pay your closing costs up front, this will be much less expensive in the long run than if you were to take either of the next two options.
- FHA will allow your lender to add the closing costs to your principal as part of the refinance, which means that you are going to finance the several thousand dollars this will likely cost over the next 30 years.
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Your lender may be willing to pay your closing costs for you in exchange for you paying a slightly higher interest rate for the life of your loan.
Not Sure? Get Legal Help
A real estate attorney can help you with more than just closing a loan on your house. If you have questions about whether this type of refinance makes sense for you, talk to an attorney who is familiar with your finances. If you plan to stay in your house for at least five more years, an FHA Streamline Refinance might be a great option for you.
