FHA streamline refinancing is a quick and simple way to improve the terms on your home loan — but it only applies to those who have already taken out an FHA loan to finance the purchase of their property. This type of home loan also has different rates, requirements, and costs when compared to traditional mortgages.
Homeowners with FHA loans may wonder whether a streamline refinance is the right financial move. In this post, we’re walking you through how FHA refinancing works, what you need to know about it, what costs to expect, and how they stack up against using a traditional mortgage refinance.
Take a look at the topics we’ll cover here:
- What is an FHA refinance?
- FHA streamline refinance closing costs and other expenses
- FHA refinance: pros and cons
- Key FHA streamline refinance takeaways
If you’re new to FHA loans and refinancing, we’ll start with some simple definitions. And if you already know what you need and are curious about costs, and pros & cons, you can skip ahead.
(Note: If you’re looking for more general information on refinancing, be sure to check out our mortgage refinance guide for an in-depth look.)
What is an FHA refinance?
In order to understand an FHA refinance, let’s first explain what an FHA loan is. When you take out a mortgage, your lender — usually a bank or other lending agency — takes a risk on you. They’re betting that if they give you money to purchase property, you’ll be able to pay it back within a set timeframe. That’s why they charge interest: to earn money from the risk they’re taking. It’s also why lenders require extensive credit checks, background checks, closing costs, and fees.
FHA loans work a little differently. One misconception is that the FHA issues the loans directly. In fact, you can still get an FHA loan from a bank or other lender; they just have to be FHA-approved. What makes a mortgage an FHA loan is that it is insured by the FHA, the Federal Housing Administration.
Being insured by the FHA means that lenders are more willing to give you favorable terms, like a lower down payment, lower closing costs, and less strict credit score requirements than you might find when applying for a traditional mortgage.
What does refinancing mean? When you refinance a mortgage, you negotiate the terms on your mortgage debt. Usually, people refinance their mortgage to shorten or lengthen the repayment period, get a lower interest rate, secure other more favorable conditions, or cash-out on home equity to complete a project.
- Should you refinance? Read our guide to find out more.
FHA loans can also be refinanced by negotiating a new FHA loan, although the reasons for your refinance may be more restricted than with a traditional mortgage; for instance, you may not take out more than $500 in cash when taking out an FHA refinance. One popular option that people seek when refinancing an FHA loan is a streamline refinance.
FHA streamline refinance
An FHA streamline refinance is a fast and simple way to refinance an FHA loan. HUD.gov specifies that FHA streamline refinancing doesn’t mean you’ll pay any less in costs, just that the refinancing process has limited documentation and underwriting requirements.
An FHA streamline refinance does come with a basic set of requirements, however. To get FHA streamline refinancing, you’ll need to make sure that you meet the following conditions:
- You have an FHA-insured mortgage. If you have a traditional mortgage acquired through a bank, credit union, or lending agency and that loan is not FHA-insured, then you will be ineligible for an FHA streamline refinance. Instead, you may want to consider a traditional mortgage refinance.
- Your mortgage payments must be current. If you are delinquent on your mortgage payments — that means you’ve missed payments or underpaid — you will not be eligible for an FHA streamline refinance. It’s also important to ask the individual lender what their bank or agency’s policies regarding delinquency are, as some lenders may have more strict requirements than others.
- The refinance results in a tangible benefit to the borrower. The HUD website specifies that the loan must prove to be a tangible net benefit to the borrower in order for you to qualify. This might mean that you end up paying less overall, or you end up with a more favorable repayment period for your specific financial situation.
- You may not take out more than $500 in cash while refinancing. Some traditional mortgage refinancing options, like cash-out refinancing, allow borrowers to take out a portion of the equity in their home as cash to be put toward high-cost expenditures or projects of their choosing. This is not an option for FHA streamline refinancing at amounts over $500.
Streamline refinancing is a good option for some people in select circumstances. In order to make a more informed decision about whether an FHA streamline refinance is the best option for your mortgage, it’s important to know the costs, as well as the pros and cons.
FHA streamline refinance closing costs and other expenses
As with any mortgage or mortgage refinance, there are a number of costs that come along with taking out an FHA mortgage or an FHA refinance. If you’re considering an FHA refinance, be sure to review these costs before making any final decisions, and weigh them against the potential costs of other financing and refinancing options.
- Interest. Like other home loans, there is interest attached to FHA mortgages. FHA streamline refinance rates can vary significantly depending on factors like your credit score, the individual bank, credit union, or lending agency you work with, and the economic conditions at the time — the way the economy is doing can raise and lower interest rates. Sometimes, FHA streamline refinance rates can be higher than traditional mortgage refinancing, so be sure to speak with a professional to learn about your options before committing.
- Down payment. Most mortgages require you to make a down payment when applying, and the same applies for FHA mortgages. The good news is that these are generally low, which is one of the reasons why many seek out FHA mortgages. Additionally, depending on the specific loan product and the lender, you might not owe any money down when acquiring an FHA refinance.
- Closing costs. There may be closing costs applied to your FHA streamline refinance depending on the specific lender you work with. Some lenders offer “no cost” refinancing, meaning that the borrower does not pay any closing costs when refinancing their FHA loan. However, the lender may increase the interest rate to offset the lack of closing costs, so be sure to thoroughly research your lender’s FHA refinancing before deciding. It’s also important to note that the closing cost amount cannot be added directly to the total cost of the mortgage for a streamline refinance.
Mortgage insurance. Mortgage insurance premiums (MIP) are an extra amount that borrowers must pay to secure a mortgage when their down payment is low; for traditional mortgages, that’s typically below 20%. Mortgage insurance may be applied to your FHA loan depending on your downpayment and other financial factors like your credit score.
- Note: The FHA may offer partial refunds on some mortgage insurance when you sign up for an FHA streamline refinance. To find out more, use the FHA MIP refund chart to get a better estimate of your potential refund.
To find out more about possible costs and factors that go into refinancing, read our guide to the mortgage refinance process.
FHA refinance: pros and cons
As you consider your refinancing options, be sure to carefully think through the FHA streamline refinance pros and cons.
- Potential for more favorable terms or lower cost
- Typically quick and easy to complete
- Possible mortgage insurance premium refund
- Lower credit requirements than a traditional mortgage refinance
- Interest rate may be higher depending on a number of factors, including the specific lender you work with and other factors
- Requirements, like FHA streamline mortgages being restricted to FHA loans, and the requirement that you cannot be delinquent on your mortgage, may exclude some borrowers
- Those looking for a cash-out refinance to fund home improvements or other large expenses may not be able to secure the funding they need through an FHA refinance
As with many financial products, the bottom line is that whether an FHA streamline refinance works for you depends on your specific financial situation. Understanding the specifics of your personal finances, where you are in your mortgage payments, and what options your lender has available is critical.
Key FHA streamline refinance takeaways
Considering an FHA home loan or FHA streamline refinance? Keep these key takeaways in mind as you continue your research and assess what options suit your personal financial profile best.
- FHA loans are mortgages approved and insured by the FHA; they have easier-to-meet requirements than many traditional mortgages.
- FHA streamline refinancing can help you secure more favorable terms on an FHA loan while also giving you the opportunity to reduce the amount you owe on mortgage insurance premiums.
- Streamline refinancing is quick and requires minimal documentation, but FHA streamline refinancing closing costs may still be applied; sometimes, these are factored into your new interest rate.
- Always research your options before settling for any particular mortgage or refinance product. Often, it’s smart to shop around before committing, that way you know you’re getting the best deal that you can get in light of your financial circumstances.
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