The decision to refinance a home is not one that should be taken lightly. There are many factors that weigh heavily upon whether refinancing is a wise choice. Beyond that, there are a variety of factors that determine the type of refinance loan is the best choice for individual homeowners and their needs.
Not only must homeowners decide if now is a good time to refinance their mortgages, but they must also choose the best option for their immediate and long-term financial needs. Homeowners must also meet the requirements to be considered for an FHA streamline refinance loan if that is the option they are considering.
What is an FHA Streamline Loan?
An FHA streamline loan allows borrowers a bit of a shortcut through the refinance process for homeowners who have existing FHA mortgages and meet certain qualifying criteria. One of the biggest benefits of the FHA streamline refinance program is that it allows borrowers to refinance their homes without having to go through the process of verifying income and assets all over again.
In some cases, borrowers aren’t required to get an appraisal in conjunction with an FHA streamline loan for refinancing. This, of course, varies according to how much they’ve paid toward their original loan balances. One of the greatest advantages for the FHA streamline program is that it allows borrowers who are “underwater” on their loans, to take advantage of lower interest rates to help them recover.
FHA Streamline Requirements
As mentioned above, the requirements to qualify for an FHA streamline refinance loan are quite strict. They include:
- Borrowers must live in the home being refinanced.
- Payments must be timely with no more than two, 30-day late payments within the past 12 months.
- Borrowers must have an existing FHA loan on the home in question.
- Loan must be a minimum of six months old to qualify for FHA streamline program participation.
- Refinancing the home must result in a tangible benefit to the borrower.
- Borrower may not receive cash exceeding $500 from the proceeds of the streamline refinance process.
While it is possible to get financing through the streamline loan program the FHA offers without an appraisal of the home (provided that the new loan amount does not exceed the original loan amount by 1.5 percent or more), it may not be wise to do so. One consideration is that closing costs can be rolled into the loan if you get an appraisal on the home. They cannot be rolled into the closing costs without the appraisal.
Borrowers should also note that FHA streamline refinance rates may vary from one lender to the next. This means it is wise to shop around and compare streamline refinance rates before deciding on a lender.
What’s the Difference in a Streamlined and Non-Streamlined Refinancing Loan?
While a streamlined loan is one that allows borrowers to refinance to reduce their interest rates, a non-streamlined refinancing loan allows borrowers to cash in the equity on their homes. For this reason, they are referred to as cash-out refinance loans in many circles.
They are only beneficial in certain situations, such as when homeowners have sufficient equity in their homes to make it worthwhile. This means that while it’s possible to consider a streamlined refinance loan (though not always advisable to do so), it is not all wise to do so with a non-streamlined loan as most borrowers will not have adequate equity in their home within six months to make this feasible.
There are many times when this is not the best option for homeowners and a few key times when it is absolutely the right choice. Especially when cashing out allows homeowners the opportunity to reduce higher interest debts, like credit card debt.
One of the beautiful things about non-streamlined refinance mortgages is that they allow borrowers to spend the proceeds of the loan as they see fit. It can be used for anything. Or, borrowers could leave it in the bank to earn interest. Probably not the best use for the money, but it is an option. Other options for the money borrowed in a cash-out refinance, include:
- Luxury vacations.
- Reducing debt.
- Investing in a business.
- Other real estate investments (vacation properties, investment properties, etc.).
- Paying large one-time expenses.
- Making home improvements.
It is entirely up to the borrower to determine how this money is spent.
No Cost Streamline Loans
Lenders, not the FHA, may offer borrowers the opportunity to get streamline refinancing for their homes without paying anything out of pocket. It might seem like a great deal to borrowers. However, it is not always the best choice.
One reason to avoid this type of loan is that lenders make up for the added risks to them by charging higher streamline refinance rates for interest. Borrowers willing to pay higher FHA streamline refinance rates to reduce their overall interest burden and monthly payments may find this attractive.
It is wise, though, to crunch the numbers ahead of time to make sure the higher streamline refinance rates do not lead to a much higher price of the home in question when all is said and done.
Another consideration for those who have made it past the initial stage of mortgage payments where mortgage insurance premiums are required is that they will need to purchase the insurance all over again if equity in the home dips lower with the new loan. What it means is that borrowers may be paying higher costs all around if the FHA streamline refinance rates are larger than expected.
Ultimately, the no-cost part of the claim is misleading as borrowers are still required to pay closing costs and other fees. Those fees are just rolled into the cost of the loan, meaning they will not only pay the fees, but also pay interest on those fees.
Only individual borrowers can answer the question of whether or not FHHA streamline refinancing loans are the right choices for their needs. It is much easier to do, though, when they make that decision armed with all the facts about the loans, interest rates, costs, fees, etc. Then borrowers can determine if these goals help them meet their short and long-term financial goals better.