Early 2015 is presenting a great opportunity for homeowners wishing to refinance their FHA mortgage, owing to a combination of low mortgage rates and a sharp reduction in the annual mortgage insurance premium.
Beginning last week, the FHA slashed its annual mortgage insurance premiums by a full half a percentage point, cutting the premium on its most popular loan type to 0.85 percent, down from 1.35 percent previously. It's estimated the change will save borrowers $900 a year on an FHA-average $180,000 mortgage.
Best opportunity could be in the coming months
With mortgage rates once again bumping down near historic lows, the premium reduction offers homeowners with FHA mortgages a window of opportunity to refinance on bargain terms. With the Federal Reserve hinting about possibly beginning to raise rates later in the year, the best deals could be in the first half of the year.
Lenders are gearing up for an expected boost in FHA refinancing, hiring additional staff to meet the demand. One lender, Freedom Mortgage, is reportedly adding 500 new loan officers to handle increased demand in the first half of 2015, according to industry publication Inside Mortgage Finance.
Demand is already kicking in since the premium reduction took effect on Jan. 26, with the Mortgage Bankers Association reporting that FHA loans increased to 13.1 percent of all mortgage applications last week, up from 9.1 percent previously, during a week when total loan applications were up slightly.
FHA streamline refinance simplifies process
Borrowers best positioned to take advantage of the premium reduction are those who already have an FHA mortgage, as such homeowners are eligible for what is called a streamlined refinance. In such an arrangement, the application process is simplified and approval is almost guaranteed as long as you've stayed current on your mortgage payments.
With a streamlined refinance, it doesn't matter how little home equity you have or even if you're underwater on your mortgage, because the requirement for an appraisal is waived. Similarly, there's no requirement to verify your income, employment status or credit score either, aside from your payment history on the loan itself.
Why such easy terms? Since the FHA is already backing your current mortgage but doesn't profit from the interest rate you pay (that goes to investors), it actually benefits from putting you into a more affordable loan with a decreased risk of default. That's what a streamlined refinance is all about.
Different rules for pre-June 2009 loans
To be sure, the reduction in the insurance premium primarily benefits streamlined refinancers who obtained their current FHA mortgage since June 1, 2009. That's because anyone with an FHA mortgage obtained prior to that date is already grandfathered into the lower insurance premium that was charged back then, and can keep that same premium when they refinance.
But those who took out an FHA mortgage since that date could shave 1-2 percentage points off their interest rate by refinancing, particularly those who bought their homes by the end of 2011. It's estimated that as many as 1 million homeowners could benefit from an FHA refinance under the new terms, according to Inside Mortgage Finance.
Refinancing for non-FHA homeowners
It's not just those who currently have FHA mortgages that could benefit, but homeowners with non-FHA mortgages could use them to refinance into an FHA loan as well. This is primarily expected to benefit homeowners with mid-range credit scores and at least some home equity, since FHA credit requirements are less stringent than on Fannie Mae or Freddie Mac mortgages.
FHA interest rates typically run slightly lower than on Fannie/Freddie loans, so the current reduction in the annual insurance premium puts them on near-equal footing, though the FHA continues to charge a 1.75 percent upfront insurance premium that the other two do not.
One downside to be aware of
One potential downside for borrowers using an FHA refinance is that you could be required to carry mortgage insurance for the life of the loan, rather than being able to cancel it once you reach 20 percent equity as you can with other mortgages.
On a home purchase mortgage or conventional refinance, you have to carry mortgage insurance for the duration of the loan if your down payment or home equity is less than 10 percent of the home value; on an FHA streamline, you need to carry if for the duration of the loan if your down payment was less than 10 percent on the original mortgage. If you have more than 10 percent equity, you can cancel mortgage insurance after 11 years.
Again, there is an exemption for those who are refinancing FHA mortgages that were originated prior to June 1, 2009, and who still can cancel mortgage insurance on the new loan once they reach 20 percent equity.
It is possible to cancel the annual mortgage insurance by doing a regular refinance once you reach 20 percent equity, but that may not make financial sense if mortgage rates have risen significantly in the meantime.
Even so, the current window of opportunity gives many borrowers a chance to reduce their current interest rate and save money over the long term, or perhaps pay their mortgage off faster by refinancing into a 15-year loan with an even lower rate. But if you're a current FHA mortgage holder and are thinking of refinancing, the next few months could be your best time to do so.