SOURCE: Carrington Mortgage Services
SANTA ANA, CA--(Marketwire - Oct 4, 2012) - With mortgage rates at or near record lows, many FHA borrowers can now save approximately $3,000 a year in excess interest costs. How? By trading in that expensive FHA loan you now have for an FHA Streamline refinance at today's rates.
"FHA Streamline refinances are a win-win for qualifying borrowers," said Ray Brousseau, Executive Vice President with Carrington Mortgage Services, LLC. "They are a way for borrowers to get better loans at a time when mortgage rates are near historic lows."
HUD estimates that more than 3 million FHA borrowers are paying 5 percent or more while current mortgage rates are hovering around 3.5 percent. The government says that by switching to an FHA Streamline refinance the typical borrower will save roughly $250 a month.
The new FHA program offers three major benefits to borrowers.
First, the FHA's up-front mortgage insurance premium (MIP) paid at closing is just 0.01 percent of the base loan amount with a Streamline refinance. For a $100,000 mortgage that's $10. In comparison, the up-front MIP for a new FHA loan is 1.75 percent.
Second, the annual mortgage insurance premium is .55 percent of the base loan amount for those who refinance. That's a lot lower than the annual MIP for a new FHA mortgage, a fee currently set at 1.25 percent.
Third, interest rates have fallen substantially during the past few years. In May 2009, the typical 30-year fixed-rate mortgage was priced at roughly 5.8 percent while this September rates had fallen to around 3.49 percent according to Freddie Mac.
The savings from refinancing can be significant.
The cost of a $150,000 fixed-rate mortgage at 5.8 percent is $880 per month for principal and interest. The same loan at 3.49 percent has a monthly expense of just $673. That's a savings of about 30 percent.
"While some people refinance to obtain a bigger mortgage and get cash out of their property, this program is intended to lower monthly expenses," said Brousseau. "For that reason, with an FHA Streamline refinance there's no cash back except for minor adjustments at closing that do not exceed $500."
Of course, there are multiple key factors that affect one's ability to qualify for a loan and/or determine the rate they are offered.
Borrowers must meet several basic standards to refinance a prime residence under the FHA Streamline program:
First, borrowers must currently have an FHA loan endorsed on or before May 31, 2009. There are several million borrowers who meet this requirement, roughly 45 percent of the 7.7 million borrowers who now have FHA financing.
Second, there must be a "net tangible benefit" to the borrower.
Generally this means that with an FHA Streamline refinance fixed-rate borrowers will see the cost of their principal, interest and annual mortgage insurance premium (MIP) fall by a total of at least 5 percent. For many borrowers the monthly cost reductions will be substantially higher. Results will vary but in the example above with the $150,000 mortgage the monthly savings for just principal and interest are more than 20 percent.
For borrowers with an adjustable-rate mortgage the "net tangible benefit" standard can mean several things. For instance, if a borrower goes from a one-year ARM to a replacement one-year ARM then monthly loan costs must drop by at least 5 percent.
Third, the borrower must have good credit and a solid payment history for at least the past six months.
"The FHA Streamline program is a reward for good financial practices," said Brousseau. "Borrowers who have had FHA loans for several years and made their payments on time will be able to see real monthly savings."
While many owners would like to get today's lower rates, it has often been impossible to refinance because of reduced home values and low appraisals. The good news is that many FHA Streamline transactions do not require an appraisal.
"With the FHA Streamline refinance the government is focusing on the borrower's credit rather than asset values," said Brousseau. "The logic is that if you've been making payments at higher rates you have an even greater ability to make smaller payments at lower rates. By making credit the central criteria for an FHA Streamline refinance, borrowers in especially hard-hit foreclosure areas can now get more help."
In other words, HUD has looked at the numbers and concluded that with smaller monthly costs borrowers with good payment histories represent a lesser risk to lenders. This happens because lower mortgage costs make homes more affordable.
"Of course," said Brousseau, the Carrington Mortgage Services, LLC executive, "the timing could not be better. Lower mortgage costs allow household budgets to go further and with more household cash homeowners can pay down other debts, put money in savings and buy more in local stores. That's good for everyone."