If it sounds too good to be true, it usually is.
December 6, 2012 9:25 AM   Subscribe

FHA Streamline Refi. Is there a catch? It feels like there should be a catch.

We live in the Bay Area. We are two years into a 30 year mortgage. Over the last few months, I have been getting a ton of unsolicited mail offering to refinance our mortgage. And they generally seemed to good to be true.

I am generally very skeptical of things like this. Thinking: someone offering something for nothing is usually not what it seems. If it sounds too good to be true, it probably is.

I finally gave in and called one of the brokers that has been mailing us. According to him, we can lower our interest rate by a full percentage point or more (from 4.5% to 3.5% or lower). There's no closing cost, no appraisal, no fees to us at all. The only thing that might come out of our pocket is the funds to replenish the impound account and that would get reimbursed by our old lender. There's no obvious trickery, like switching from a fixed rate to an ARM or anything like that.

So from my perspective, this seems too good to be true. We get a lower interest rate on our mortgage for essentially nothing. Is there a hidden catch here that I'm not aware of?
posted by gnutron to Work & Money (14 answers total) 2 users marked this as a favorite
Have you looked at the US Treasury department's page on the MHA?
posted by shothotbot at 9:28 AM on December 6, 2012

Well it might be that you should be getting a lower rate than they are offering you. Like right now the average 30 year refi rate per bankrate.com is 3.36%, so the 14bps represents all of those fees and charges they are telling you they don't have.

That ends up being about $2000 in Present value terms using the 30 treasury as the discount rate.
posted by JPD at 9:47 AM on December 6, 2012

er - 2000 per 100k in mortgage
posted by JPD at 9:53 AM on December 6, 2012

Most of them say no closing costs, but what they mean is that you won't pay costs out of pocket as they'll get rolled into the loan. In most cases, the point off you'll get won't be worth the additional monies and years (2 in your case) added to the loan, but you might want to sit down and do the math for yourself.
posted by PorcineWithMe at 9:57 AM on December 6, 2012

Yeah, here's the thing. FHA loans have special PMI on them. Our PMI payment would increase so much with the new PMI costs, than any savings on the actual interest would be eaten up. So although we're at 5%, it still doesn't make any sense for us to refi.

Call your current mortgage provider first, see what they say. B of A was pretty cool with us, we quickly did the math and decided to sit tight.
posted by Ruthless Bunny at 10:03 AM on December 6, 2012

You might not get the best rate as you are getting lender credit and a slightly higher rate and no fees.

Also, I just refinanced for 3.25% last month and I saw that rates were around 3.125% the other week, so make sure you are getting the best rates.
posted by wongcorgi at 10:04 AM on December 6, 2012

I asked a similar question a few months ago that might be helpful.
posted by rabbitrabbit at 10:13 AM on December 6, 2012

We actually just did this, going into it every bit as skeptical as you. The only sticking point is that your mortgage needs to have been recorded (there is another more technical term I am forgetting) by Sallie Mae before June 1, 2009. To qualify for the streamline, the refinance including PMI also has to lower your payment by a certain percentage (again escaping me, but your lender will make the calculation for you). If you meet those criteria you are able to refinance without getting a new appraisal. We were also able to do it with no closing costs by shopping around brokers. I would definitely recommend looking into it. It was a very easy process (after nightmare experiences with a broker previously) and our interest rate went down by quite a bit.
posted by goggie at 10:20 AM on December 6, 2012 [1 favorite]

MIP on new FHA loans is much higher than it was on old FHA loans. We did a refi a couple of months before the new rates kicked in, but that leaves us at 4.25%. Refinancing into current rates and current MIP would mean paying about half the UFMIP again (we're also in year two of the new loan) and the extra 0.7% MIP would erase the cash flow benefit of the lower rates.

If your loan-to-value is low enough to avoid monthly MIP (less than 78%), that would help, but in that case you'd probably be better off getting a traditional mortgage.
posted by wierdo at 11:04 AM on December 6, 2012

I failed to note that in your case, since you're coming from 4.5%, you may just see a few dollars a month improvement.

It's worth investigating, but don't get too excited.
posted by wierdo at 11:07 AM on December 6, 2012

I just did this, coming from 6.6% down to 3.85% and it's saved me about $250 a month on my mortgage. I did have to bring some money to the table, about $2k, but the majority was to replenish my escrow. If you were making a big leap in interest, I'd say phone around and investigate further, but since you're making just a small step, it might not be worth it as much.
posted by THAT William Mize at 11:11 AM on December 6, 2012

Talk to your current lender, especially if they are one of the big banks. There's a lot of refi activity going in right now, driven in a large part by government programs to try to untangle the housing market mess.

Here's something, though - are you on a fixed rate mortgage or an adjustable rate? If you're on an adjustable rate, you may (and talk to a pro about this stuff, I'm no expert!) want to refinance pronto because the rates are ridiculously low. If you're on a fixed rate mortgage and you're looking at lowering your rate from 4.5% to 3.5%, it may not be a huge advantage depending on what you owe and what the closing costs and new PMI on the loan will be. Especially since you just paid the two most interest heavy years on your mortgage and you would do that again with a refi. Talk to someone who doesn't have a financial interest in the transaction.

Just to give you an idea of the refi activity, we had a non-FHA loan that was about five years in. We were never late but apparently we were eligible for HARP 2. Our lender refinanced our mortgage, from a 30 year 6.375% to a 15 year 3%, with no fees and a very simple approval process. And we're still getting bombarded with refi offers.
posted by azpenguin at 3:30 PM on December 6, 2012

It is pretty good, but not too good to be true - the fees and new upfront PMI get rolled into your loan balance, which increases; and the lower interest is somewhat offset by the higher monthly PMI. (In addition, if you were benefiting from a mortgage interest income tax deduction, that decreases substantially, because the amount of interest paid decreases; monthly PMI is no longer deductible.)

And of course, the term of the loan is extended, probably to 30 years again, which ends up costing you substantially more over the long run as you are signing up for more years of these lower payments.
posted by Protocols of the Elders of Sockpuppetry at 1:11 AM on December 8, 2012

Response by poster: FWIW, PorcineWithMe and RuthlessBunny were right on target.

Called our lender (BoA), did the math, determined that we'd see a huge bump in our mortgage insurance that would wash out nearly all the savings we'd get from a lower interest rate.
posted by gnutron at 2:28 PM on December 13, 2012

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