MIP Reduction Takes Effect - Some Other Considerations

You are no doubt aware that the reduction in the FHA premiums for mortgage insurance went into effect yesterday, 01.26.2015.  There are a number of people with FHA loans that might benefit from refinancing their existing FHA loan into another FHA loan with lower MIP.  As stated in an earlier post entitled, "More Level Playing Field May Benefit FHA" the Wall Street Journal estimates that there are about 3,000,000 existing FHA borrowers who could benefit from refinancing into a new FHA loan.

In an article appearing today in Mortgage News Daily a representative of Indecomm, a mortgage document management company, indicated that there are other factors to be considered in determining if a borrower may benefit from refinancing an existing FHA loan into a new FHA loan.  A big factor to be addressed is the Upfront Mortgage Insurance Premium ("UFMIP"), which is 1.75% of the loan amount.  A borrower is subject to payment of a new UFMIP on a refinance, however, depending on the age of the borrower's existing FHA mortgage, the borrower may be entitled to a credit against the new UFMIP.  The credit can range from 80% for a loan that is one month old to 58% for a year old loan, 34% for a two year old loan and tapering to 1% at month 36 of the loan term.  After month 36 there is no credit.

Another factor to be considered on an existing FHA loan with a closed case number that was issued prior to 06.03.2013, is that the MIP is automatically reduced when the LTV reaches 78%.  The article however did not indicate the extent of the reduction of the MIP once the loan reaches an LTV of 78% or less, but is a point that needs to be investigated when counseling a client of the advantages / disadvantages of rolling over an existing loan into a refinance.

For new FHA loans with an LTV of greater than 90%, it is important to not that the MIP is a "life-of-the-loan" cost.  For loans with an LTV equal to or less than 90%, MIP will be dropped after eleven years.

As with any refinancing, consideration must be given to closing costs.  With the streamline FHA refinance, an appraisal is generally not required, but there are some lenders who nonetheless require a new appraisal.  That point needs further investigation.  The closing costs need to be added to all other costs of refinancing to determine the break-even point.

In addition to the factors stated, it is a good idea to take a look at the borrower's credit.  Even with a FHA streamline refinance, the borrower will need to qualify from a credit standpoint so that if the borrower has not be vigilant with paying bills since taking out the existing FHA mortgage, the interest rate may well be affected.

An FHA refinance does have some additional considerations that are not present with a conventional loan refinance.  Be sure to consult someone who is familiar with FHA loans before advising a client to jump into a new loan.