FHA Streamline rates have been known to be amongst the lowest rates available this year. The program is simple to qualify for and the ability to save a significant amount of money each month is reachable. Because the FHA Streamline program does not require an appraisal, income/employment verification or even verification of your credit, you will likely be able to obtain the refinance if you already have an FHA loan. The Streamline program is meant to provide you with today’s low rates without the headaches of qualifying for a new loan. As long as your housing payment history is clear for the last 3 months and has a maximum of one 30-day late payment in the 9 months preceding that, you will be a good candidate for this loan.
As already stated, FHA rates are among the lowest available, especially today. If you obtained your original FHA loan a few years back, chances are rates are much lower now. Even a difference of one eighth of a point can save you a significant amount of money on a monthly and yearly basis. If you add up those savings over the life of the loan, which is typically 30 years, you could be saving thousands and thousands of dollars in the end.
How FHA Streamline Rates are Determined
Contrary to popular belief, FHA rates are not set by the FHA themselves, but rather by the market. The economic indicators as well as the secondary market play a vital role in the basic interest rates that are offered. In general, the better off the economy is, the higher the FHA Streamline rates will be and the worse the economy gets or even the outlook for the economy, the lower the rates will become. The entire philosophy is tied into the rate of inflation. If the outlook for the economy is good, employment rates are up, and spending is high, the government does not need to step in and stimulate the economy. On the other hand, if the economy is sluggish, the Fed needs to step in and boost things up; they do this by lowering the interest rate provided to the banks to borrow money, making it easier for money to exchange hands and for consumers to purchase homes.
How FHA RefinanceRates Change
Not every borrower is going to receive the same FHA Streamline rate though. There is the base rate, but that rate is very rarely provided to borrowers unless they are the “perfect” borrower, meaning perfect credit, perfect debt ratio, and with an adequate investment in the home. Since the “perfect” borrower does not often exist, there are many factors that you should know to understand how the interest rate you are provided came about. It is also important to know that your rate could change from one lender to another based on the riskiness of your loan and what the lender is willing to take on at any given time. Lenders need to balance out their portfolio with risky and non-risky loans; if you go to a lender that has a large amount of risky loans, they are not going to be willing to take on many more risky loans or if they do, they are going to adjust the interest rate accordingly in order to ensure they make a profit while you are paying on the loan in case you do default in the future.
- Credit history – This is often the largest determination of the final interest rate you are provided. The higher your credit score is, the lower the interest rate the lender will charge you. For example, a borrower with the 580 FHA minimum credit score for a 3.5% down payment will pay a higher interest rate than a borrower with a 660 credit score. In general, an excellent credit score is considered around 760. This means a borrower with this score or higher will have a better chance at obtaining the lowest FHA interest rate available with no adjustments. A borrower with a riskier score, say around 600, would have a higher rate to make up for the riskiness of the loan.
- Debt ratio – Your debt ratio plays an important role in the riskiness of your loan as well. The more debt you have compared to your monthly income, the higher the likelihood of you defaulting on your loan becomes. The general “good” debt ratio is around 35%. Because the FHA will accept debt ratios higher than 35%, you should expect to play a slightly higher interest rate in order to get the loan. On the other hand, if your debt ratio is below the 35% threshold, your rate will be lower.
- Loan to Value – FHA loans offer the ability to put down just 3.5%, which means you have a high LTV, or very little equity in your home. If you are taking advantage of the FHA Streamline refinance shortly after obtaining the original loan, you will still have a high LTV, which makes lenders add some basis points to your interest rate to make up for the risk. On the other hand, if you put down more than the minimum 3.5% down payment or you have paid on the loan for a while and have more invested in the home, your LTV will be lower as will your interest rate. Most banks believe that the “more skin you have in the game” the less likely you are to default on the loan, resulting in a lower interest rate.
- Loan term – A 30-year loan term is riskier than a 15-year term. Because most FHA borrowers take on a 30-year term because it is more affordable as the payments are amortized over 30 years rather than 15, interest rates seem a little higher. If you can afford the 15-year payment you can obtain very lucrative FHA Streamline rates as a result.
- Discount points – Some borrowers prefer to pay more money upfront at the closing for their loan in exchange for a lower interest rate. These are called discount points and are paid directly to the lender. This is the lender’s way of making the same profit; he just gets the money up front rather than over the life of the loan in the interest. For some borrowers, it makes more sense to take the lower monthly payment and pay the extra costs up front.
FHA Streamline rates are often among the lowest rates available on the market. They are comparable and often lower than conventional rates, but they come with other fees that conventional loans do not have. The largest benefit of FHA loans is the ability to make a small down payment and have mediocre credit and still be able to get into a home. Even an FHA loan with a few risky attributes will have a comparable interest rate to the standard conventional loan, giving many more consumers the opportunity to become homeowners. If you were a borrower that obtained an FHA loan a few years back and have a significantly higher rate than is offered today, the FHA Streamline program can get you into those low rates with very little verification to qualify for the loan, making it easy to refinance and make your mortgage payments more affordable.