I work with a lender who is doing these for many of my buyers. Although there is no 'out of pocket' cost to you (and it is true, they do not run a credit check), there is a cost to these loans. Usually, that cost is absorbed into the loan. This is how I understand it from the lender (and you will want to check your documents and ask your lender, specifically, how he is getting paid):
1. There is no credit check run.
2. There is no appraisal run.
3. As long as the FHA insurance is in place on your loan and you have been making your payments you qualify.
4. Each month, as you have made your payments, you have paid down the principle on your loan.
5. The new loan is written for the same amount as the old loan.
6. The difference between the original balance of your loan and the current balance of your loan is how the lender gets paid for doing this deal.
7. If that difference is not enough, then they will get paid by writing the loan at an interest rate slightly higher than the par rate, or the rate at which no points would be charged for the loan. (Example: FHA par rate is 5.0%, lender / broker writes the loan at 5.125%. This is how the yield spread is generated, which results in some money coming back to the lender / broker to pay for their efforts.)
The upside to you is best illustrated by an example. Let's say you bought your home a year ago, your loan was $300,000 and your interest rate was 6.5%. If you have the loan re-written at 5.125% you will save $262.74 per month on P&I or over $94,500 over a 30 year loan.
The down side to you. The loan is re-written to 30 years (which means, in the above example, you will be making payments on your home for 31 years before it is paid in full). The $3,353 you paid down in principle goes away, as your loan balance will be reinstated to $300,000. The $19,400 you paid in interest will offset the $94,500 savings, dollar for dollar, so your actual savings is $75,100 over the life of the loan.
All that being said, for many people this is still a good option. Sure, saving the full $94,500 would be nice, but I have yet to find a person who will turn down a gift $75,000 because it is not $94,000. And, in todays tough times, reducing your monthly expenses by $263 could buy a lot of hamburger and gasoline for the family. So, check out the documents, ask the right questions, make a fully informed decision and Dare to Dream.
Real Estate Consultant
RE/MAX Palos Verdes Realty