Should I do an FHA streamline refi if my rate is 4.875%?

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This is a scenario I’m reviewing for one of my clients who lives in Seattle.  His existing mortgage is a 30 year fixed FHA at 4.875%. He closed on this loan after June 1, 2009 so it does not qualify for FHA’s reduced mortgage insurance premiums*. However, he can still take advantage of today’s low mortgage rates as long as the refi meets HUD’s “net tangible benefit” requirements of reducing his payment by at least 5%.

HUD’s Net Tangible Benefit requires that the “PIMI” (principal, interest and mortgage insurance) payment be reduced by at least five percent or the refinance cannot happen. This has been an issue for home owners who would like to refinance from their FHA 30 year fixed to an FHA 15 year fixed as HUD does not make an exception for those who would like to shorten their mortgage term if the payment increases — even if the borrower qualifies with documenting their income (some FHA streamlines do not require income to be documented). 

The Seattle client I’m working with is doing a “credit qualifying” FHA streamline refi for a 30 year fixed.  His current principal and interest is $1171.55 and the monthly mortgage insurance payment is $95.90 for a total PIMI payment of $1,267.45.  His new PIMI payment needs to be less by at least 5% ($63.37) which means his new PIMI needs to be $1,204.08 or lower.

As of 10:00 am this morning (July 6, 2012) I’m quoting 3.375% for a 30 year fixed FHA streamline refi with no appraisal (apr 4.554) with a base loan amount of $212,750.  After his upfront mortgage insruance premium credit from his existing FHA insured loan and interest rate credit, he’ll need to bring in about $1200 at closing. He won’t have a mortgage payment due until a month after closing and receiving a refund of his existing reserve account balance a couple weeks after closing.  

But what about the new PIMI?  Principal and interest is $957.01 and the monthly mortgage insurance is $210.85 for a total PIMI of $1,167.86.  The new refinance meets HUD’s net tangible benefit requirement.  

The Seattle homeowner is reducing their payment by $100 per month. **And after 60 payments and when the loan balance reaches 78% loan to value, the monthly mortgage insurance will terminate.  

**UPDATE 12/19/2012: FHA mortgage insurance will not be cancelled on new mortgages effective January 2013. It will remain on the life of the loan (until it is paid off or refinanced to a non-FHA mortgage).** Read more here.

*NOTE: If the FHA mortgage being refi’d was endorsed by HUD prior to June 1, 2009, the savings would be even greater as it would qualify for reduced mortgage insurance.

If you have an FHA insured mortgage and are interested in an FHA streamlined refinance on your home located anywhere in Washington, please contact me.  I’m happy to help you!

Comments

  1. My situation is almost identicial to the above scenario to the date & dollar amounts. However, I’m not 100% convinced it’s the best decision. Restarting the clock and the principal for what is only a inital 5 year $100 saving ($6k) ….. obviously the last 25 years see’s the real savings.

    • Hi James, obviously a lot will depend on how long you plan on retaining your home. It is a personal decision.

      I’m not sure why the savings would only be for “an initial 5 years”?

      • Thanks for your reply Rhonda. Sorry, I mean after the monthly mortgage insurance premium drops off (hopefully at 5 years but it could take much longer to reach 78% – perhaps not until 2023), then I would see additional savings of $200 for a total of $300.

  2. Jerry Harshbarger says:

    Rhonda, I don,t live in Washington, I live in Idaho, but my situation is almost identical, with one exception.We closed prior to June 1 2009. When we went to do a FHA Streamline, everything was fine until we found out that closing prior to June 1st 2009 isn’t the issue, it’s when you are funded by FHA, which can be several weeks or even months. Our lender never mentioned this and after going through the process of re-finance just to find out that we would have to pay the increased PMI, was frustrating. Am I correct or did I miss something.

    • Jerry, the originating lender would not know if your existing FHA mortgage was endorsed by HUD prior to June 1, 2009 until they have your previous FHA Case number. This can be found on your existing deed of trust.

      Do you still qualify to refi without the reduced mortgage insurance? HUD requires that your new PIMI is reduced by 5% to meet “net tangible benefit” guidelines (which I think should be dramatically changed).

  3. Could you clarify this statement? “when the loan balance reaches 78% loan to value”
    I refi’d into a FHA loan from a construction loan on 3/10/10, with a loan balance of $329K, and the lender ordered appraisal came in at $395K. As of 12/2012, my loan balance is $321K. If I were to refi 1/2013, my MIP would fall of when my loan reaches 78% of $395K or $329k? Also, isn’t there a rule, that I have to pay at least 5 years of MIP, before I can get rid of it? Is that 5 years from 3/2010, or 5 years from 1/2013?

    • Hi SR,
      With your existing FHA loan, your FHA mortgage insurance should drop off when your principal balance reaches 78% of the loan to value – since you had a refi, I would imagine this is based off of the appraised value. You also need a minimum of 60 payments before this happen. 78% of $395,000 is $308,100. You would need this to be your principal balance and 60 payments from 3/10/10.

      IF you refi to a new FHA loan in 2013, the FHA mortgage insurance will remain on the loan for the LIFE of the loan!! It will NEVER cancel. This is brand new with FHA. And watch for higher mi rates with FHA on newer loans. I have a few recent post on this on my blog.

      • Just clarify, if I refi’d my current FHA loan using “FHA Streamline Refinance” in 2013, after 60 payments from 3/2010 my MIP can terminate, if my LTV is 78%? However, I refi’d from a non-FHA loan to a new FHA loan, the MIP will never cancel?

  4. Hey, I just reread the article and saw your update, which answers my question. You’re the best!

  5. Dear Rhonda, thank you so much for a valuable article. You must be overwhelmed with several comments/requests, but I was wondering if you could point me in the right direction. If I refi my 30 year 5% fixed FHA loan, to 3.75%, I will be saving $232/mo (even if my monthly PMI more than doubles)

    How can I calculate in how many years my refi will breakeven? (taking into consideration all those PMI payments: upfront $8,750 and monthly $505) and if I refi by March, do you think I will make it before HUD changes it FHA regulations?

    • Hi Nozima, there are a couple different ways you can weigh your break even point.

      1. review an amortization schedule of the new loan to see how many months it will take to return to your current principal balance; or

      2. divide you monthly savings into your net closing cost.

      I prefer reviewing amortization schedules. I think option 2 is better when used for deciding if you should pay additional discount points.

      The upfront MI is probably financed (I’m assuming?) and you may be getting a credit of your current ufmip to help reduce that hit (check with your LO).

      I have no way of knowing when HUD will guarantee your loan – so I’m not able to provide an answer to your last question. :)

  6. Hi rhonda, i have currently an fha mortgage with 20 year term that was endorsed before june 1,2009. I do have 16 years left on the loan. I oam trying to refinance my house for 25 years term using the fha streamline. I was told that fha will only allow me to add 6 years on top of the 16 years remaining on the loan, so basically i can only refinance for 20 year can term

  7. Lawrence Brown says:

    I’m dealing with a client with an adjustable rate FHA mortgage that won’t adjust until Jan.1 2015. There won’t be a 5% savings with his current rate. Is this possible?

    • Hi Lawrence, It’s very possible since HUD requires the savings to be based off of the principal,interest and mortgage insurance (PIMI) payment. I’m assuming since your client’s ARM won’t adjust until Jan 1 2015, that it was originated prior to June 1, 2009 – which would allow them to qualify for reduced mortgage insurance w/a streamlined refi. Today’s higher FHA mortgage insurance premiums may make it challenging to do a streamlined refi.

      Another factor will be the term of the current ARM. Here’s more info from HUD:

      What are the Net Tangible Benefit requirements for an FHA Streamline Refinance?

      For case numbers assigned on or after April 18, 2011 the lender must determine that there is a Net Tangible Benefit (NTB) to the borrower as a result of the streamline refinance transaction, which is defined as a 5% reduction to the monthly principal, interest and mortgage insurance payment (PI & MIP); or refinancing from an adjustable rate to a fixed rate (in accordance with the conditions in the Net Tangible Benefit matrix).

      FIXED
      Fixed to Fixed
      - Minimum 5% reduction in PI & MIP
      Fixed to One Year ARM
      - Minimum 2% interest rate decrease
      Fixed to Hybrid ARM
      - Minimum 5% reduction in PI & MIP

      ONE YEAR ARM
      1 Yr ARM to Fixed
      - Maximum 2% interest rate increase
      1 Yr ARM to 1 Yr ARM
      - Minimum 5% reduction in PI & MIP
      1 Yr ARM to Hybrid ARM
      - Minimum 2% interest rate decrease

      HYBRID ARM (During Fixed Period)
      Hybrid (Fixed Period) to Fixed
      - Minimum 5% reduction in PI & MIP
      Hybrid (Fixed Period) to 1 Yr ARM
      - Minimum 2% interest rate decrease
      Hybrid (Fixed Period) to Hybrid ARM
      - Minimum 5% reduction in PI & MIP

      HYBRID ARM (During ARM Period)
      Hybrid (ARM Period) to Fixed
      - Maximum 2% interest rate increase
      Hybrid (ARM Period) to 1 Yr ARM
      - Minimum 5% reduction in PI & MIP
      Hybrid (ARM Period) to Hybrid ARM
      - Minimum 2% interest rate decrease

      Reducing the term of a mortgage is acceptable on a streamline refinance if the new mortgage meets the net tangible benefit test.

      Handbook 4155.1 6.C.5

  8. Miguelin Riva says:

    Good Afternoon,

    I’m looking to do a streamline for my current properly. I bought the house in August 2009 which means I’m not qualified to the streamline reduced rates. My current APR is 5.25 and wondering if I should sell the house or doing a streamline. What can I do? What is the best scenario and/or worse scenario for my situation. Please help.
    What is the current APR for streamline? I have a FHA insure home loan.

    Thank you

    • Hi Miguelin,
      I’m not able to provide advice for your situation without more details – including:
      (1) is the home located in WA state? (I’m only licensed in WA and cannot provide a quote for homes located outside of Washington state). If your home IS in Washington:
      (2) what is your current loan amount and estimated credit scores (for a rate quote)
      (3) what is your current total mortgage payment?
      (4) how long do you plan on retaining the home? What is your current estimated balance of the home?

      Thanks!

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