What Causes Mortgage Rates to Rise & Fall?
There were a lot of expectations for 2022, and it certainly started strong—just not in the most positive way. The combination of another record consumer price index (CPI) release, the lasting impact of another COVID strain on the economy and Fed policy changes puts many experts on high alert for rising rates.
In recent years, the historically low rates have given many homeowners enough reason to consider refinancing their existing mortgage. However, the trifecta mentioned above may mean it’s time to search for a lender sooner rather than later.
Fortunately, you may be able to save time and refinance your FHA loan by qualifying for an FHA streamline refinance.
Defining the FHA Streamline Refinance: An Overview
Refinancing can be mind-numbing and time-consuming, leading to procrastinating until it’s too late. The streamline refinance program presented by the federal housing administration offers homeowners a rapid and simplified refinancing process.
There are two options to select from, but they both require the homeowner to have a current FHA loan.
The most common option is the non-credit qualifying loan. This is one of the benefits of the FHA streamline refinance, and it serves to reduce a homeowner’s rate or monthly payment. The second is the credit qualifying option. This option is typically applied in one of the following scenarios:
- The refinance will increase monthly mortgage payments by at least 20%
- The original loan is less than six months old
- The refinance will involve adding or removing a borrower
Regardless of which option you select, it’s clear that the benefits of this program are quite significant. For a homeowner to be eligible, they must have made the last six payments on time, have the original FHA loan for at least six months, and the program must present a clear financial benefit.
The financial benefit can include receiving a lower interest rate, converting to a fixed-rate mortgage or lowering the monthly mortgage amount.
Pro #1: Home Appraisal Not Required
Forgoing a home appraisal helps homeowners to save significant amounts of time and money. This is most advantageous for homes with loans much more than their assessed value.
The FHA doesn’t require a home appraisal because it uses the original purchase price to determine the current value.
Pro #2: No Requirement for Proof of Income or Employment
This benefit only applies to those receiving a non-credit qualifying loan. For these, because the refinancer already met the requirements for the original loan, the FHA considers them to be eligible.
However, it’s beneficial to remember that while the FHA doesn’t specifically require a credit score, some lenders may require a minimum score of 620. It’s always best practice to ask around before selecting your preferred mortgage lender.
Pro #3: A More Rapid Process
Like its name, this program offers homeowners a much more rapid and straightforward process than other refinance options. In addition to removing the home appraisal requirement, it also requires substantially less documentation.
For many cases, the FHA streamline refinance program is typically completed within three weeks.
Pro #4: Similar Rates to Regular FHA Mortgages
Oftentimes, lower credit ratings, among other reasons, leave high-interest rate loans as a borrower’s only option. Unless it’s an emergency, it typically makes zero sense to refinance to a higher rate.
Fortunately, this program offers borrowers rates similar to other FHA mortgage loans. Remember, one of the requirements for this program is that it must present a clear financial benefit for the borrower.
And there are clearly zero financial benefits if you were to receive a higher interest rate, especially since there’s no cash-out option.
Pro #5: Zero Early Payment Penalties
Wanting to eliminate a high amount of debt like a mortgage shouldn’t be held against a borrower. Some prefer making an additional payment when they can, and others may even come into a windfall that allows them to pay their mortgage off entirely.
Either way, these actions shouldn’t be something a homeowner gets penalized for. The FHA streamline refinance program allows borrowers to do just this. It serves to help them get out of debt much sooner than originally planned.
Pro #6: Increased or Eliminated Maximum Loan-to-Value Ratio
The last benefit of this program is that it allows homeowners with minimal or no home equity to be eligible. This is only possible because the program has increased loan-to-value ratios to the point where there’s no maximum amount.
While this is excellent news for many borrowers, it’s only possible because of the following disadvantage.
Con #1: Limited Refinance Amount
The two benefits of seemingly limitless loan-to-value ratios and having no home appraisals can be seen as a risk to a lender. One way to reduce risk is by limiting a borrower’s refinance amount.
The limited amount is because the FHA streamline loan operates by refinancing the current mortgage. In addition to the limited refinance amount, borrowers don’t have the option to cash out.
If you have a large amount of equity in your home that you wish to take out, it’s more advantageous to seek other traditional refinance options.
Con #2: Lack of Financing for Closing Costs
A borrower is also responsible for any closing costs. Unlike other refinance options, it’s not possible to roll the closing costs into the overall loan amount.
Some lenders may offer to cover any closing costs. However, this can be disadvantageous, and the borrower must carefully read the fine print. This is because loans like these typically come with higher interest rates.
Con #3: Required Mortgage Insurance
One of the most significant disadvantages is that this program requires mortgage insurance, even with over 20% equity. Mortgage insurance premiums (MIP) are required to lower the risk for lenders.
It requires borrowers to pay an upfront cost and an annual premium every month.
The upfront MIP would equate to 1.75% of the loan amount if the original loan was initiated after June 2009. The ongoing annual MIP paid monthly equates to 0.85% of the loan.
Con #4: No Cash-Out Option
As briefly mentioned earlier, this program doesn’t offer a cash-out refinance option. If you have at least 20% equity in your home and need a lump sum of cash, it’s beneficial to consider other refinancing programs.
Selecting a non-FHA cash-out refinancing program allows you to get the cash you need and presents the opportunity to eliminate your monthly and annual MIP.
Is It Time to Refinance My FHA Loan?
Waiting for the perfect time to act often leads to missed opportunities. The trifecta of record-breaking CPI data, Fed policy changes and emerging COVID strains may well mean it’s time to refinance your FHA loan. However, determining your eligibility and the perfect program doesn’t have a blanket answer.
The perfect program and perfect time to refinance generally are case-specific. You must consider your overall financial picture and if the program you select, such as the FHA streamline refinance, works to your benefit.
For specific details and to see if this program is right for you, speak with our qualified loan specialists today!