I have an FHA mortgage, will my Mortgage Insurance be reduced?

As recently announced, the FHA will be reducing their annual mortgage insurance premium from a factor of 1.35 to .85.  This translates to $500 per year in savings for every 100K borrowed.

This reduction combines with today's low fixed rates can result in some significant savings for current FHA borrowers.  How to take advantage of the FHA mortgage insurance premium reduction is what we will discuss today.

I currently have an FHA mortgage, will my mortgage insurance premium be automatically reduced? 

Nope.  If you currently have an FHA mortgage your mortgage insurance premium will not be automatically reduced. You have to apply for this new reduced mortgage insurance premium either with a regular FHA refinance or with an FHA streamline refinance.

What is the difference between a regular FHA refinance and a FHA streamline refinance?

The regular FHA refinance involves verifying the value of the home with an appraisal, verifying income, and an in-depth analysis of the credit history and the credit score.  The FHA streamline refinance does not require an appraisal of the home, does not require any income verification, and the credit report history is limited to just verifying that the mortgage has been paid on time.  Other credit does not factor in to the approval of an FHA streamline refinance. This means that borrowers can qualify for the FHA Streamline Refinance program even if they have late payments on car loans or credit cards, etc or even if they are the midst of a bankruptcy. 

The FHA does not allow closing cost to be rolled into the new mortgage balance with the FHA streamline refinance program. With this program the new loan amount is very close to the current balance and payoff amount.  This results in the borrower not having a substantial increase in the amount owed on the house.  Rather than have the borrower bring money to closing, FHA streamline refinances are generally structured with the lender issuing a credit to cover any and all closing costs. This credit is usually achieved by the letter adding around .25 or more to the interest rate, thereby absorbing the closing costs into the interest rate rather than having the borrower pay these costs out of pocket.  

Since the FHA streamline refinance lowers the monthly payment without the need for an increase to the loan balance, these savings are often worth pursuing even if the drop in payment is not dramatic.  The FHA requires that there be at least a 5% payment reduction from the current payment to the new payment.