July 21, 2011
FHA loans are available with terms of 15 and 30 years. Borrowers can choose shorter loans with higher payments, or they can choose a longer loan term and lower payments depending on what their financial priorities are.
The shorter-term loan with higher monthly payments can result in less money being paid in interest over the lifetime of the loan, but for many borrowers the higher monthly obligation isn’t as affordable.
Choosing the right loan term for your financial goals and monthly budget can be tricky. Some choose the longer loan term to maintain their monthly budget, but as people progress in their careers it may be more affordable later to take on those higher payments. Some decide simply to pay more than the monthly amount due, but others may seek a refinanced loan at the shorter duration and more competitive interest rate.
For those who choose refinancing, there’s a frequently asked question–can the borrower get an FHA Streamline Refinance Loan for the purposes of reducing the mortgage term?
According to FHA rules, “A transaction for the purpose of reducing the mortgage term may not be closed as a streamline refinance”. Instead, these loans, “must be underwritten and closed as a credit qualifying rate and term (no cash out) refinance”.
There’s a reason why the loan can’t be processed as a streamline loan. According to FHA regulations, streamline loans must show “a net tangible benefit to the mortgagor as a result of the streamline refinance transaction, with or without an appraisal.” Those tangible benefits can include a reduction to the principal and interest of the loan, or a move from an adjustable rate mortgage to an FHA fixed-rate loan.
According to a recent update in FHA Streamline Refinance loan rules, “Reducing the term of the mortgage, in and of itself, is not a net tangible benefit.”
This means borrowers who seek a refinancing loan to reduce the mortgage term must qualify for the new loan the same way they did with the original mortgage, with a credit check and other qualifying procedures.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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