You currently have an FHA loan and hear rates are lower than what you have now. Should you take advantage of the FHA Streamline loan? After all, this simple program enables you to refinance with very little verification. You can even be upside down on your home and refinance! Unfortunately, there is no magic 8 ball waiting to tell you the right answer. However, there are a few simple ways for you to tell if the refinance will be worth it for you. Taking the time to answer the following questions and look closely at your scenario can help you determine the right choice for you.
What are the Costs of the FHA Streamline Refinance?
First, you need to figure out the costs of refinancing your loan. No refinances come free of charge. Even if you are able to snag a no-closing-cost-loan, you pay in the interest rate (aka a higher interest rate). In the case of the FHA streamline loan, though, let’s assume you pay closing costs. You may pay them at the closing with cash or wrap them into your loan – either way you pay them.
The costs to consider on the new loan include:
- Origination points
- Discount points
- Underwriting fees
- Processing fees
- Credit report fees
- Title company charges
- Recording fees
- Upfront mortgage insurance premium
These are just a sample of the fees you may pay. Every lender differs. Basically, any fee on your loan estimate should be included in your calculation. These are the fees the lender and third parties will charge you in order to process and close your loan.
What are Your Savings?
Next, you want to figure out how much you will save each month with the FHA streamline refinance. Everyone saves with this program or the lender cannot approve it. The FHA created the program strictly to help homeowners make their mortgage payment more affordable. When you calculate your savings, figure in each of the following numbers:
- Principal
- Interest
- Real estate taxes
- Homeowner’s insurance
- Mortgage insurance premium
Take the full payment of your original FHA loan and subtract the new full payment from it. This will give you the amount of money you will save each month.
Figure Out Your Recapture Period
Now you can figure out how long it will take you to recapture your savings. You do this by taking the total of the costs for the new loan and dividing them by the monthly savings you will reap each month. For example:
- Closing costs $11,500
- Original FHA total loan payment $1850
- New FHA total loan payment $1600
- Monthly savings $250
Your recapture period in this example would equal 46 months = $11,500/$250.
Generally, lenders would like to see your recapture period less than 48 months or 4 years. In this example, you would be just under that guideline. Other lenders are stricter about it and like borrowers to start seeing their savings after just 3 years.
It’s Not Just the Rate
Many people make the mistake of focusing on the interest rate alone. If they hear interest rates dropped even 1% below the rate they pay, they immediately want to refinance. This might sound like a good deal, but it depends, as we discussed above. There is more to a refinance than the interest rate. You have to consider the costs involved. Oftentimes, the costs are too much to make refinancing worth it, especially if you plan on moving anytime soon. Saving money on your monthly payment is not the only consideration to make.
For instance, look at our above example. It would take you almost 4 full years to start to see the benefit of an FHA streamline refinance. What if you move in 3 years? You just cost yourself a lot of money and never saw the benefit of the refinance. Even if you move in 5 years, is 12 months of savings worth it to refinance? Typically, it isn’t worth it.
When is the Refinance Worth It?
This is a personal decision, obviously, but the people who know they will stay in their home for the long-term, often benefit the most from refinancing. This doesn’t mean to refinance every time rates decrease even with the FHA streamline program. Just because you don’t need an appraisal or to verify your income doesn’t mean you need to refinance. You still have to pay to refinance the loan and by pay, this means in the $10,000 range. Of course, every lender differs on their costs, but this is a typical number borrowers see at the closing.
A Short Recapture Period
Basically, if your recapture period is short because your savings is so great on a monthly basis, then you may benefit from refinancing. Let’s say you have not refinanced your home for many years and you still pay an interest rate in the 6% range. You probably stand to save a significant amount of money each month with today’s low rates. If you shop the loan around enough and get your closing costs as low as possible, it could be worth it for you to refinance. Generally, the shorter the recapture period, the more sense it makes to refinance.
Before you jump into the FHA streamline refinance you think you need, look at your situation. Carefully calculate how much the new loan will cost you as well as how much it will save you. Figure out your recapture period and then determine if you will stay in your home beyond that period. How long do you want to see the savings? Are 12 months enough? Would you prefer to save for say 5 years? The choice is up to you. As long as you focus on the big picture, and not just the fact that you are lowering your interest rate, you will make the right choice for your household. This leads to less wasted money and more money to enjoy life!
