New FHA Rules Make Refinancing More Attractive

The Federal Housing Administration (FHA) has changed its streamline refinance option to help between 2 million to 3 million borrowers take advantage of low interest rates.

The “streamline” refinancing option allows homeowners with FHA-backed loans to reduce the interest rate on their current home loans quickly and often without an appraisal. It also cuts down on the amount of paperwork that must be completed, which saves valuable time and money.

Unfortunately, many homeowners haven’t been able to take advantage of the program even as interest rates hovered around historic lows. That’s because upfront and annual mortgage-insurance premiums have increased sharply over the last two years. For many, the higher insurance premiums offset any savings they would have gained from lower interest rates.

What’s new

In early March, the Obama administration announced a decrease to the insurance premiums on certain streamline refinance transactions. The FHA will drop upfront insurance premiums from 1 percent of the loan balance to 0.01 percent in June. Annual premiums will drop from 1.15 percent of the loan balance to 0.55 percent.

This will make the prospect of an FHA refinance much more attractive, as homeowners will no longer be subject to the higher premiums in place today. The FHA estimates that, as a result of this decrease, some borrowers may be able to save as much as $3,000 a year.

Who’s eligible

This initiative applies to FHA borrowers who secured a loan on or before May 31, 2009. Your lender can tell you precisely when the FHA “endorsed” your loan for insurance.

Streamline refinances are available only to borrowers who have made all of their last 12 payments on time. In addition, your refinancing needs to be able to provide you a net savings of at least 5 percent in your monthly principal, interest and mortgage insurance payments.

This initiative is effective for loans that will be originated on or after June 11, 2012, so you have some time to talk with a mortgage advisor to see if a streamline refinance is the right approach for you.

If you’re not eligible

You won’t qualify for this particular program if your present mortgage isn’t backed by the FHA, but that doesn’t mean you shouldn’t think about refinancing. With mortgage rates at near-record lows, you may be able to lower your monthly payments or shorten the terms of your loan.

Scott Ractliffe can be reached at 615-743-6006 or scott.ractliffe@pnfp.com.