LOS ANGELES, Nov. 28, 2012 /PRNewswire-iReach/ -- Record low mortgage rates have encouraged many Americans to refinance their mortgage this year, and the most popular option by far has been the Federal Housing Administration's (FHA) Streamline Refinance.
Just how popular is this option?
According to the FHA, 84% of all refinances this year have been through this program. Plus, closings for Streamline Refinances more than tripled in August 2012 when compared to the same month from the previous year. The same report from the FHA estimates that by year's end, they will have insured over 1.1 million of this type of refinanced mortgages. Only certain people can apply for this type of refinanced mortgage, so it's important to know the details surrounding this option.
So what is a Streamline Refinance, and why is it the top choice of consumers looking for a cheaper mortgage payment today?
In simple terms, a Streamline Refinance is a special mortgage program for homeowners with an existing FHA-insured home loan. In other words, homeowners with conventional mortgages through Freddie Mac and Fannie Mae don't qualify. This type of refinance option requires very little paperwork, It also doesn't require an income verification or a re-appraisal on the property.
To answer that question, we must first address what the FHA is, and why they offer these services. It's important to remember that the FHA is not a mortgage lender, but a federal program that acts as a mortgage insurer. It was created to help more Americans who might not otherwise qualify for mortgages to have the opportunity to own a home. The FHA also gives lenders some peace of mind, in case the borrower ends up not being able to pay for the home. In other words, if you receive a mortgage from a lender that is FHA-insured, and you default on the loan, forcing the bank to seize your home in a foreclosure, the lending bank can file a claim with the FHA and get repaid for its losses. So, it only makes sense that if the FHA insures original mortgages that it would also insure refinances. After all, if they can find a way that helps homeowners have a cheaper mortgage payment, it helps everyone. By helping a homeowner stay up-to-date on his payments with the lender, the homeowner gets to keep his home. Then, the bank doesn't have to deal with a foreclosure, and the FHA doesn't have to pay back any losses to the bank. Now that you know why the FHA created the Streamline Refinance program, let's go over how it works… The FHA's goal is to reduce the amount the borrower owes each month on their mortgage. So, it doesn't ask for income or credit verification or a re-appraisal on the property. For an FHA Streamline Refinance, the idea is to get as many people approved for a refinance as possible. Instead of a new appraisal, the FHA will allow you to use your original purchase price as your home's current value, regardless of what your home is actually worth today. Because it has an unlimited loan-to-value ratio, and allows you to refinance at no additional cost or penalty, this is sometimes the only refinance option for homeowners who are underwater on their mortgage. Lenders know this, so they are likely to point you in this direction if you don't qualify for a traditional refinance option. Other than the no re-appraisal guidelines, Streamline Refinances are similar to conventional ones – meaning they are available as fixed or adjustable-rate mortgages, come in 15 or 30-year loan periods, and there's no prepayment penalty to worry about. If you're considering refinancing your mortgage, and your original loan is FHA-insured, this is an option you may want to consider, and discuss with your lender today.