One more reason to refinance your FHA ARM ASAP

by Gina Pogol
February 24th, 2011

By now, you probably know that FHA is raising its monthly mortgage insurance premiums. Again. But the trend of rising interest rates also presents added incentive to refinance an FHA loan sooner rather than later. That’s because if you want to take advantage of the easier and cheaper refinancing through the FHA streamline refi program, you need to pass the Net Tangible Benefit test. This is to prevent homeowners from being talked into refinances that strip their equity without doing them much good financially.

Here’s the scoop:

Streamline refinance from an adjustable rate mortgage:

1. If the new mortgage is a fixed-rate loan, its interest rate cannot exceed that of the current mortgage by more than 2 percent.  So if you are paying in the 3 percent range your new fixed loan can’t be much more than 5 percent.

2. If you’re refinancing to a new ARM, your new payment must be at least 5 percent lower than your old payment. So if your principal, interest, and mortgage insurance is $1,000 a month, your refinance payment can’t exceed $950. The new, higher mortgage insurance premiums could make that figure harder to hit.

3. If you’re refinancing to a hybrid ARM, say a 5/1 loan with a rate fixed for five years, your new loan must have an interest rate at least 2 percent lower than that of your current loan.

Streamline refinance from a fixed-rate mortgage:

1. If refinancing to a fixed-rate loan, your new mortgage payment must be at least 5 percent lower than your current payment.

2. If refinancing to an adjustable rate mortgage, your new interest rate must be at least 2 percent lower than your current mortgage rate. Why would you refinance to an ARM from a fixed rate? If you plan to sell in the next few years, it could be smart, since FHA ARM interest rates only increase at a rate of 1 percent per year.

3. If refinancing to a hybrid ARM, your new payment must be at least 5 percent less than your current payment.

Streamline refinance from a hybrid ARM:

The rules depend on whether you refinance while the hybrid ARM is still in its introductory (fixed) period, or during its adjustable phase. If it’s still fixed, the guidelines are identical to those of the fixed rate mortgage refinance. If it’s in its adjustable phase, the guidelines mirror those of the ARM streamline refinance.

FHA streamline refinances are a cheap and easy way to lower your monthly payments and/or rate. So check with some lenders and see if you can’t save by pulling the trigger on a streamline refinance now.

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