The FHA Streamline Refinance is a great way to save money every month when you refinance from an FHA loan into another one. The only reason you can get an FHA streamline loan is if you are lowering the interest rate, with the exception for those borrowers that refinance from an adjustable rate mortgage to a fixed rate mortgage. Because of the nature of the loan, which does not require any verification, you must be saving money every month. The largest verification required for the streamline program is the payment history – you must have a perfect 3-month payment history on your housing payments for the three months immediately preceding the loan application and a maximum of one late housing payment in the 9 months preceding that time. Other than that, the verifications are very minimal, which is why your loan balance cannot increase for a streamline refinance.
Where does the Loan Balance come From?
The loan balance for your streamline refinance originates from the existing outstanding principal balance on your loan. This is the starting point. The only other amount of money that can be added to the loan is the upfront mortgage insurance premium you must pay. This amount is required on every loan and is equal to 1.75% of the loan amount. For example, on a $200,000 loan, the upfront MIP required would equal $3,500. This means the maximum amount of your new loan amount would equal $203,500. This amount could change, however, if your loan was originated less than 36 months ago. The FHA provides FHA borrowers with a refund of the upfront MIP they paid on their original loan. This amount is prorated based on the amount of time that has passed since the origination of the loan.
Since you cannot refinance your FHA loan until you have made 6 payments on it, the upfront MIP refund starts in the 7th month, at which point you receive 70% of the amount of insurance you paid back as a refund, which is applied towards your new upfront MIP. The amount you receive goes down 2 percent for every month that passes, with the final amount of the refund totaling 10 percent of the amount paid in the 36th month. This amount is taken off of the new upfront MIP, therefore reducing your maximum loan amount on the FHA streamline refinance.
Closing Costs are not Included
The one thing about FHA streamline refinances is that you cannot include your closing costs in the loan amount. You are restricted to the outstanding principal balance and the remaining amount of the upfront MIP charged – all closing costs must be paid at the closing. There is a way around this, though – you can negotiate a no-closing cost loan with the lender or a reduced closing cost loan, depending on how low you need the interest rate to go in order for the FHA to allow the streamline refinance.
Many lenders are willing to pay the closing costs for you in exchange for providing you with a slightly higher interest rate. Every lender differs in how much they will pay and how much it will affect your interest rate, which is why you need to shop around with different lenders to see which will offer you the best deal. If you do not have the couple of thousands of dollars necessary to pay closing costs, find a lender that will pay them for you. Of course, you should determine if it makes sense for you to refinance if you take the higher interest rate, though. In some cases, the savings do not equate to enough if you are not planning on staying in the home for the long term.
Overall, the maximum loan amount for the FHA streamline refinance is maxed out at the original outstanding principal balance plus any upfront mortgage insurance that is required. Lenders offer different programs for different borrowers, so do not be afraid to ask for help with the closing costs if you know that a refinance will benefit you in the long run.