Streamline refinancing came about in the 1980s as homeowners grew weary with the prolonged closing process and its extensive underwriting and paperwork requirements. Streamline mortgages rely on the underwriting and approvals that were obtained when the mortgage was initially written, saving both time and money at closing. Like any mortgage product, a streamline refinance does have both limitations and advantages, and it's up to the homeowner to decide if a streamline mortgage is the best choice.
Types
There are two types of streamline products: FHA streamline mortgages, available to homeowners whose homes have an FHA mortgage; and VA streamline mortgages, for homeowners with VA mortgages. VA streamline refinance mortgages are available to active duty personnel, reservists and veterans.
Requirements
As noted, streamline refinance mortgages are only available for homes with either FHA or VA mortgages. In addition, mortgages must be in good standing--that is, all payments must be up-to-date. In every case, the new mortgage must have a lower interest rate than the initial mortgage, giving rise to the loan's other common name: IRRRL, which stands for Interest Rate Reduction Refinancing Loan.
Advantages
Because these loans rely on prior underwriting, in many cases a credit check is not required. In addition, most streamline products do not require a new appraisal, saving both time and money. In some cases, you may also qualify for a "no-cost" streamline refinance. These mortgages roll the closing costs into the overall cost of the mortgage, or increase the interest rate slightly to cover the closing costs, eliminating hefty out-of-pocket closing fees that can be prohibitive to many homeowners. In some cases, streamline refinancing can also be used to refinance investment properties.
Limitations
The primary limitation of streamline products is that they are only available to those who have existing FHA or VA mortgages; homeowners with other types of mortgages will not be eligible. "No-cost" streamlines can result in a higher monthly payment than you were hoping for. Finally, you can't take out cash during a streamline refinance, which means that if you hope to tap into your home's equity to repay other debts or afford home renovations or another large expenditure, a streamline is not right for you.
Caution
Some less-than-honest lenders may lead you to believe that they are the only ones who can provide you with a streamline refinance; in fact, any lender can process a streamline mortgage. You may choose to go with your current lender or with another lender when shopping for your loan.
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