Is the FHA streamline mortgage refinance really free or a scam?
The FHA streamline refinance is a mortgage program that allows borrowers, with FHA loans, to lower their existing mortgage payments and bypass many of the requirements that lenders usually require for new loans. The logic behind the reduced requirements is simple. FHA streamline refinances do not allow borrowers to increase their current loan balances. Since no additional money is being loaned, there is no additional risk for FHA or the lenders. This is also why they often waive appraisals.
Although FHA streamlines are simple and fast (most close within 30 days), they are still considered mortgage refinance transactions. Under the Real Estate Settlement and Procedures Act (RESPA) all refinance transactions require that the title companies (usually attorneys) review the files and pay all of the required municipal fees at closing. Even if a lender waives their fee (Ex. no-closing-cost loans), the title company and local recording fees must still handle the closing and be paid. This raises the primary question. Can mortgage companies advertise no-closing-costs programs when essentially all mortgages have mandatory fees? Are FHA streamline loans really free?
The answer is yes and no. Yes, there are legitimate ways for FHA borrowers to lower their mortgage payments, without increasing their loan balances and without upfront cash. No, all programs that say no-closing-cost mortgages are not truly no-cost. The majority make it sound free, but actually charge upfront fees and add the fees to borrowers loan balances. How does this happen? Most borrowers do not understand the specific meanings of various mortgage terms and unknowingly misinterpret what they hear or read.
The terminology mortgage companies use in advertisements is often the cause of the discrepancies. When lenders promote no-closing-costs mortgages, people generally assume the loan will be free. Since most borrowers do not know the difference between settlement fees and closing cost, they simply interpret no closing costs to mean absolutely no fees or costs. This is what confuses most people.
There are distinct differences between the terms closing costs and settlement fees. Closing costs are exclusively the fees that the banks or lenders charge. These fees are generally for underwriting, credit reports and miscellaneous fees. However, there are other parties involved and other costs in a mortgage transaction to consider.
Settlement fees are a completely separate set of fees. The settlement fees are not controlled by the lender and are not paid to the lending entity. The settlement fees are the combination of attorney, title and local recording costs that are required to close a loan. Remember, when lenders state no-closing-costs the lenders are only waiving their fees. This does not meant that the borrowers will not incur any fees throughout the transactions. The settlement fees for attorneys and recordation always have to be paid. In most cases, the fees are added to the borrowers existing mortgage balances, but there are some exceptions.
Although they are rare, a few lenders offer FHA streamlines loans that do not add closing or settlement fees to the borrowers loan balances. They also require no cash. This is possible, because the lenders pay the fees for the borrower by issuing the borrower a Title Fee Credit. The Title Fee Credit covers the fees the lenders would typically add to the borrowers balances. The borrowers receive lower mortgage payments, without upfront cash and without using equity to pay fees. The lenders benefit, because they only use a portion of their commissions or revenue to pay the settlement fees via the Title Fee Credit. Everyone wins.
There are some drawbacks to loans that have the lender pay the settlement fees. First, the borrower rarely gets the lowest rate available, because the lender often increases the rate slightly to justify paying the settlement fees. Second, if a borrower plans to stay in the home for a long time and does not anticipate lower rates in the future, the Title Fee Credit options could end up being more expensive over time. However, in most cases it makes more sense to avoid upfront costs whenever possible, even if it means paying a slightly higher rate. If the borrowers decide to move, sell the homes or see opportunities to drop their rates further in the future, they do not have to worry about money spent on previous transactions.
In conclusion, when a borrower is able to refinance without cash out of pocket and without adding fees to their existing loan balance, many would consider the transaction free. Although attorneys may disagree, most consumers consider a loan free when they get a lower mortgage payment and keep their loan balances the same. When considering an FHA streamline refinance or interest rate reduction loan, be sure to look at the transaction as a whole and select the option that is most feasible for you.