Ever buy something only to see it go on sale immediately afterwards? Homeowners with FHA mortgages may be feeling that way these days – the agency recently announced a .5 percent reduction in mortgage insurance premiums for FHA mortgages with terms exceeding 15 years. However, this reduction applies only to new loans. If you already have a purchase loan or an FHA refinance with higher mortgage insurance premiums, you don't get a break.
There is a solution, however – an FHA streamline refinance.
Does an FHA Refinance Make Sense for You?
The FHA streamline refinance does not require an appraisal, income documentation or credit underwriting. It can cost less and is usually processed quickly. Because FHA mortgage insurance lasts for the entire life of the loan, getting a half point reduction in premiums has the same effect as a .5 percent drop in mortgage interest rates. However, there are a few points to consider.
Not Everyone Gets the Same Break
Prior to July of 2008, annual FHA insurance for 30-year home loans was .50 percent of the loan balance for everyone, regardless of their loan size or their loan-to-value ratio, and the upfront premium was 1.5 percent of the loan amount. Over the years, however, both the upfront and annual premiums changed several times. In 2013, the annual premium was increased 1.35 percent for most borrowers (30 year loans with 3.5 percent down). The new rate is .85 percent. This table shows new rates for all FHA loans.
Loans originated in April of 2011 or later are likely to carry higher premiums than these new ones. Loans originated before then came with lower premiums, and refinancing would not provide a significant insurance savings.
There's another consideration, however – the upfront MIP. You paid it when you got your original FHA home loan, and you'd have to pay it again if you choose an FHA streamline refinance – today, that's 1.75 percent of the loan amount.
You may qualify for a partial refund of your upfront mortgage insurance premium. If your current FHA mortgage is less than three years old, you'll be able to get some of your old upfront premium refunded to you, partially offsetting the cost of the new insurance. In addition, you can wrap the insurance into your loan, so it doesn't have to come out of pocket. The chart below shows what your refund might be.
The .5 percent insurance reduction may not be the only savings available to you. Here's a rundown of other factors that could put money in your pocket.
Mortgage Rates Have Dropped Sharply
Your potential savings is magnified by the fact that the FHA's move has coincided with a steep drop in mortgage rates. According to mortgage finance company Freddie Mac, after briefly edging above four percent in mid-November, 30-year mortgage rates went on a sustained slide that saw them down to 3.63 percent by the third week of January. That means you might be able to add a half point interest rate reduction to the half percent insurance break and pay a lot less each month.
Lower LTV Could Cut Your Rate
The recent .50 percent reduction may be just part of what you save on FHA insurance premium if you have paid enough of your loan's principal. If you have brought your loan-to-value ratio down to 95 percent or lower, you would enter a lower insurance premium tier, shaving off another .05 percent.
If you originally had a jumbo mortgage, but your refinance amount is lower than $625,500, you could save another .20 percent. These amounts add up – for example, if you took out a 07 percent jumbo FHA mortgage after April 2013, you'd be paying 1.55 percent annual mortgage insurance per year. That's a whopping $9,695 for a $625,500 loan in year one! If you can get that loan balance below 95 percent of your home value and also below the jumbo threshold, you'd save .70 percent interest, and the premium for a $625,000 loan would drop by $5,320.
Shorter Terms Save Interest and Insurance
If you can afford the possibility of higher monthly payments, you might be able to refinance to a 15-year mortgage instead of a 30-year one. The payoff for doing so is that 15-year mortgages have both lower interest rates and a lower range of FHA mortgage insurance premiums.
Dumping FHA Might Be Best Option
In addition to comparing your old FHA home loan to new FHA home loans, look into conventional (non-government) options. Private mortgage insurance is often cheaper for people with good credit, and there's no upfront premium required.
Compare Lenders to Increase Savings
When you factor in insurance premium reductions and the decline in mortgage rates, it can be exciting to see how the potential savings pile up. Still, don't neglect to take a last step that can add a final level of savings. FHA loan rates are not all the same, so compare quotes from multiple lenders to get the most competitive rate you can.
A mortgage calculator is a good place to start in figuring out whether you could benefit from refinancing. Given the complexity of issues involved with FHA loans, however, it's smart to have a lender do a detailed analysis of how the APR and total payments for your old and new loans would stack up.
If that analysis works in your favor, refinancing can be like getting a "do-over" on something that went on sale after you already bought it. Better yet, with refinancing it isn't just a one-time benefit, but something that could save you money for years to come.