The Federal Housing Administration (FHA) offers home buyers and owners the opportunity to access affordable mortgages despite having low credit or minimal funds. FHA insures loans made to borrowers who have difficulty getting conventional financing. FHA protects lenders, reimbursing them in the event of borrower default. As the borrower on an FHA-insured mortgage, you might wonder whether refinancing into another loan program is the right choice for your investment.
A refinance pays off an existing loan with proceeds from a new loan. An FHA loan can be refinanced using another FHA loan or a conventional loan. The transaction involves qualifying for the new loan and paying closing costs. The most common refinance programs are rate refinances and term refinances, for borrowers who want a different repayment term and interest rate. A cash-out refinance involves accessing the home's equity to pay off debts or obtain cash at closing. A cash-out refinance has a higher loan amount than the previous loan, so it's generally more difficult to qualify for than rate and term refinances.
There are several good reasons for refinancing an FHA loan. FHA requires borrowers to pay a mortgage insurance premium each year, which is collected in monthly installments. The mortgage insurance remains in effect for at least five years. The loan must be paid down to 78 percent of the original balance or appraised value, whichever is lower, to remove mortgage insurance. By removing mortgage insurance installments, the borrower can put their funds towards their new loan's principal balance, paying it off sooner. Obtaining a lower interest rate through the refinance also accomplishes the same goal of paying more money toward principal reduction and growing equity at a faster rate.
FHA's streamline refinance is a loan program with an expedited process for replacing a current FHA-insured loan. It can be completed without credit, income or employment verification and doesn't require an appraisal. A home with a lower market value than what is owed on the current loan can still be refinanced through the simplified process. It is a good idea to streamline-refinance an FHA loan if you meet all requirements because the loan's main purpose is to benefit the borrower in at least one of two ways. The borrower must experience a net tangible benefit in which his monthly payment is lowered by at least 5 percent; or his adjustable interest rate is replaced by a fixed rate. In order to qualify, the borrower must be current on his FHA loan.
In March 2012, the Temporary Payroll Tax Cut Continuation Act of 2011 increased the cost of obtaining a new FHA loan. Following its announcement, the government introduced a new refinance structure that allows borrowers to streamline refinance an existing FHA loan at a dramatically lower cost. The Up-front Mortgage Insurance Premium fee is slashed to the lowest amount allowed by FHA, which is .01 percent. This is down from 1 percent which was previously charged for the UFMIP, according to HUD. The program reduces fees only for borrowers with loans issued before June 1, 2009. Borrowers with these loans can streamline refinance with the discounted UFMIP for an indefinite amount of time.
- CNN Money: Obama Cuts Refinance Costs for Some Mortgages
- HUD: Handbook 4155.1: Chapter 6, Section C: Streamline Refinances
- HUD: Mortgagee Letter 2012-04: Single Family Mortgage Insurance: Annual and Up-Front Mortgage Insurance Premium – Changes
- Los Angeles Times: FHA Streamline Refi is A Breeze for Homeowners Who Qualify
- Bankrate: Canceling FHA Mortgage Insurance
- GPO: Temporary Payroll Tax Cut Continuation Act of 2011
K.C. Hernandez has covered real estate topics since 2009. She is a licensed real estate salesperson in San Diego since 2004. Her articles have appeared in community newspapers but her work is mostly online. Hernandez has a Bachelor of Arts in English from UCLA and works as the real estate expert for Demand Media Studios.