When the FHA announced that they would be increasing their upfront and monthly mortgage insurance fees it was widely assumed that FHA streamlines for FHA loans that were originated after May of 2009 would no longer make sense. But with rates testing all time lows that assumption is proving to be false in many cases.
FHA streamlines for older FHA loans remain a no-brainer
As we have discussed here in the past, for people with FHA loans that were originated and endorsed by the FHA before June of 2009 there are some extremely beneficial new rules which eliminate the upfront mortgage insurance premium along eliminating any increases to the monthly mortgage insurance fees. Streamlining these older FHA loans is normally a cost-free refinance and with rates testing all time lows this summer, getting an FHA streamline for the folks who qualify for this pre-June-09 program is usually an easy decision.
FHA streamlines for newer FHA loans can make sense too
Here is the problem with streamlines of FHA mortgages that were originated after May of 2009. First, there is an up front FHA fee of 1.75% of the loan amount. Second, the monthly mortgage insurance fees more than double. Here is and example of a $200,000 FHA loan:
– Loan amount: $200,000
– 1.75% Upfront FHA mortgage insurance fee rolled into the new loan: $3500
– Monthly mortgage insurance fee: Going from about $90/month to probably closer to $200/month
It is not hard to see why people assumed FHA streamlines of newer FHA loans were dead. The increase in monthly mortgage insurance fees tends to eat into monthly savings on a such a streamline pretty significantly. Using our example loan above, if the existing FHA loan were at 5.25% and the new FHA mortgage were at 3.75% the principal and interest payment would decrease about $200 per month. But the monthly mortgage insurance would increase by $110 per month (as noted above) so the net monthly savings would be about $90 per month. And while $90 per month in savings isn’t bad, if the balance of the loan also were to increase by $3500 it would take a long time — more than three years — to break even on a refinance like that.
So what has changed to make streamlines for newer FHA loans make sense now? The answer is this: In recent months interest rates have improved so much that some authorized lenders are now able to give enough of a lender credit to pay for that entire 1.75% up front fee along with most of the other costs of the FHA streamline on behalf of the borrower. So in the example I gave above the net monthly savings would still be about $90 per month at 3.75% but there would be no costs rolled into the loan at all so the break even on the refinance would be immediate. The long term advantages of reducing such a loan from a rate in the 5’s to a rate in the high 3’s are even more significant. That is in part because after 5 years the monthly FHA mortgage insurance fee could drop off entirely. So after 5 years the payments could decrease by another $200 per month in the example we are using.
Conclusion
If you have and FHA loan that is less that three years old there is still hope for you with the FHA streamline program. This is particularly true if your current rate is in the 5’s or higher.
Contact us in the sidebar to the right to learn more about the FHA streamline program or to get an estimate from an authorized lender. Or if you don’t have an FHA loan now contact us to learn more about the HARP program or other government-backed refinance programs as well.