Ask Dr. Don By Don Taylor, Ph.D., CFA • Bankrate.com

Should we do an FHA streamline refinance?

Dear Dr. Don,
We received some calls from different mortgage companies offering us a lower interest rate with "streamline refinancing" only for FHA loans. These companies claim that they are the only ones that work with the government and that the government offers this type of refinancing: no closing costs, no home inspection, no credit review. Sounds too good to be true. Our current rate is 7.5 percent, 30-year fixed. We are also thinking about putting our house up for sale next spring. What do you think? Should we process this type of refinance until we make a decision on our future, or is it not worth it to refinance? Help!
Thanks,
Naty Newloan

Dear Naty,
The FHA library has a Web page devoted to FHA streamline refinancing. The following is excerpted from that page:

A streamline refinance refers only to the amount of documentation and underwriting that is conducted on a loan file by the mortgage company. Mortgage companies may offer FHA streamline refinances at "no cost" (actually no out-of-pocket expenses to the borrower) by charging a higher interest rate on the new loan. Other companies may offer streamline refinances that wrap the costs into the new mortgage amount. Unfortunately, there must be sufficient equity in the property. Before deciding which option best fits your needs, it is important to weigh not only the costs but also the long-term impact that a higher rate or a higher mortgage payment will have.

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FHA streamline refinances do not require credit underwriting unless the principal balance is increasing, in which case HUD requires a 12-month payment history. New individuals may be added to title on a streamline refinance without credit review. Deleting individuals from title on a streamline refinance may require qualification (certain exceptions may apply).

The following are basic requirements of an FHA streamline refinance:

• The mortgage to be refinanced must already be FHA insured.
• The borrower must have been making the mortgage payments on time.
• The refinance must lower the principal and interest payment of the previous mortgage payment.
• The borrower may not receive cash from loan proceeds.
• Any subordinate financing may remain in place as long as it is subordinated on title.
• The loan recipient must have owned the property and had the FHA mortgage for at least six months to be eligible.
• The term of the new mortgage must be the lesser of 30 years or the unexpired term of the mortgage plus 12 years. A borrower cannot refinance from a 15-year loan to a 30-year loan.
• An appraisal is not required unless the closing costs are wrapped into the loan. Streamline refinances without an appraisal are limited to the unpaid principal balance, minus any refund credit of the mortgage insurance premium, plus the new upfront mortgage insurance premium if it is to be financed in the mortgage.
• No termite report is required.
• The borrower cannot be late, delinquent, or in default of any federal debt.

There are plenty of mortgage brokers that can offer you this product. That's not the issue. The issue is that if you're planning to put your house up for sale in the spring, then the advantages to refinancing will be meager to nonexistent. If the lender plans to recoup the closing costs through a higher interest rate, then there won't be much, if any, interest rate savings. And if the lender wraps the closing costs into the loan balance, the increased loan balance is likely to more than offset any interest rate savings.

Finally, watch out for prepayment penalties that would throw a wrench in your plans to sell in the spring. FHA loans do not have them, but if you refinance from another source, make sure there's not a prepayment penalty associated with the loan.

-- Posted: Dec. 9, 2003