Mortgage interest rates are at historic lows across all major loan types. Ellie Mae’s October 2020 Origination Report showed that FHA loans are no exception — average mortgage interest rates for FHA loans hovered at 3.01% in October. And, homeowners are ready to take advantage of the opportunity to lower their monthly payments.
An FHA streamline refinance allows current FHA homeowners to drop their monthly payments quickly. The program requires no appraisal or income documentation which speeds up loan processing and the credit standards are lenient.
The only hurdle to the program are closing costs.
FHA doesn’t allow closing costs to be added to a new refinance loan
Many mortgage loans like a conventional refinance or FMERR allow borrowers to finance closing costs into the new refinance loan to reduce out-of-pocket expenses. The FHA’s rules are a little different. The maximum loan amount for an FHA streamline refinance is calculated by subtracting the FHA MIP refund from the current unpaid principal balance, then adding the new upfront MIP costs.
(Current unpaid principal balance) – (FHA MIP refund) + (New upfront MIP cost) = New maximum loan amountFHA streamline refinance maximum loan calculation
For example, assuming a current FHA loan closed 12 months ago with a current loan balance of $150,000, the new loan amount would be as follows:
- Current balance: $150,000
- Upfront MIP refund due to borrower: $1,522
- New upfront MIP due: $2,625
- Max new loan amount: $151,103
The new maximum loan amount does not include an “allowance” for closing costs. For an FHA streamline refinance, typical closing costs range between $1,500 and $4,000. Though, closing costs can vary widely depending on the lender, borrower characteristics, and the loan amount.
The good news is that you don’t always have to pay these costs out of pocket.
Lender-paid closing costs on an FHA streamline refinance
Lenders want your business.
Streamline loans are in high demand — overall, they take less time and resources to process compared to other loan types. Lenders also don’t have to order an appraisal. This minimizes the risk of wasted time and energy if the home’s value does not appraise for the expected amount.
Lenders also don’t have to verify your income for the new loan. If you’ve been paying your mortgage, lenders assume you’ll continue to do so when you have a lower monthly payment.
These factors add up to lenders wanting a lot of FHA streamline refinance business. And, that’s good news for consumers. By getting multiple quotes from multiple lenders, banks and mortgage companies have to compete. This gives FHA streamline refinance applicants the leverage to reduce their out-of-pocket expenses.
For example, an FHA applicant gets two FHA streamline quotes at 3.5%. One lender quotes $2,000 due at closing, the other lender $1,000. The borrower can, and should, negotiate using lower closing costs with the higher-priced lender. By trying this method, many borrowers can drastically reduce or even eliminate their out-of-pocket costs without increasing their interest rate by rolling closing costs into the loan.
Service release premiums give lenders the power to negotiate
Ever wonder how lenders are able to waive thousands of dollars in fees?
Lenders enjoy what’s called a service release premium (SRP). It’s a fee not disclosed on the Good Faith Estimate or other loan documents. Lenders collect the SRP when they sell a closed loan to a loan aggregator like Fannie Mae or Freddie Mac. For FHA loans, the aggregator is Government National Mortgage Association, or GNMA, who is owned by the U.S. government. (GNMA pools together loans and sells them off as securities to investors, who enjoy collecting the interest the borrower pays over the life of the loan.)
The SRPs that the lenders collect from these aggregators can add up to thousands of dollars. This money can be applied to pay for all or part of the borrower’s closing costs. The closing costs still exist, but the borrower isn’t required to pay them or is reimbursed any cost paid upfront.
FHA streamline refinance applicants have the power to lower their FHA closing costs by negotiating the lender pay them.
FHA Streamline Refinance Closing Costs
In addition to the fees listed below, borrowers are also required to prepay some expenses like taxes and homeowners insurance. Though, the borrower’s current lender typically sends a refund of a similar amount when the loan closes. This means the net cost for borrowers is often close to zero for prepaid items.
|Loan origination fee||0-1% of the loan amount|
|FHA upfront mortgage insurance premium (MIP)||1.75% of the loan amount (less MIP refund)|
|FHA mortgage insurance refund||10-68% of original FHA UFMIP (see chart)|
|Appraisal||$0 (not required)|
*This is a list of possible fees for an FHA streamline refinance. While not an all-inclusive list, it should give you an idea of general closing costs.
Your loan could require higher or lower fees depending on the lender, the loan amount, and your credit score among other loan factors. The only way to get an accurate estimate is to get a Good Faith Estimate from a lender to see their quoted costs. Once you get this estimate from at least two lenders, then you can start to negotiate your fees.
While these costs may seem large, keep in mind the amount of money the lender collects in SRP at closing — this gives the borrower power to negotiate.
Can you refinance from an FHA loan to a conventional loan?
If you have an FHA loan, instead of a streamline FHA refinance, it’s possible to refinance to a conventional loan once you have 5% equity in your home.
Refinancing to a conventional can give you the benefit of lower interest rates and allow you get rid of your private mortgage insurance (if you ahve 20% equity in your home).
But just because it’s possible to refinance from an FHA loan to a conventional loan, it might not make financial sense for your situation. Plus, you’ll need to provide asset verification and will probably need to pay for an appraisal, while an FHA Streamline Refinance can help you drop your monthly payment quickly and without so much documentation or an appraisal.
FHA streamline borrowers aren’t hindered by closing costs
Even though the FHA doesn’t allow closing costs to be rolled into the new loan amount that doesn’t mean borrowers have to pay those fees out of pocket — the high demand for FHA loans gives lenders (and borrowers) more leeway to negotiate a lower rate and fee structure. With mortgage interest rates at historic lows, now’s the time to refinance your FHA loan. There’s no reason to be paying more for your home loan than necessary — and that includes closing costs to refinance.