Net Tangible Benefit and Refinancing Options for Homeowners
Choosing a mortgage that is right can be confusing, but connecting with a mortgage professional can help. Homeowners should only refinance when there is a reasonable financial advantage by refinancing also known as a net tangible benefit.
The first thing a homeowner should ask themselves is what is the purpose, goal and does it make sense?
Different Types of Loans
When qualifying for a mortgage, loan program guidelines will vary based on credit, capacity and collateral. There are pros and cons to each type of loan program and a borrower should consider the following factors:
- Do I qualify?
- If applicable, will the property meet appraisal requirements for that type of loan?
- Are the closing costs and interest rate higher than or lower than other loan programs?
Loan types:
- Conventional loan.
- FHA loan.
- VA loan.
- USDA loan.
- Non-QM loan.
- Hard money loan.
Borrowers should consider the net tangible benefit when refinancing – underwriters must follow guidelines, which are put in place to protect homeowners.
What is a Net Tangible Benefit
A net tangible benefit can be thought of as a loan transaction that puts a borrower in a better financial position. Some general examples include:
- Refinancing from an Adjustable Rate Mortgage (ARM) to a fixed rate.
- Reducing the monthly payment.
- Lowering the interest rate.
- Reducing the loan term.
- Cash out and debt consolidation.
- Divorce buyout.
- Eliminating mortgage insurance.
- And other factors.
For certain loan programs, there are rules that are considered to make it possible to close on the refinance transaction.
Conventional Net Tangible Benefit
Depending on the state, there are forms that must be completed to satisfy compliance requirements.
Conventional loans are stricter when comes to qualifying for a loan with credit, income, and debt-to-income ratios, but more lenient when it comes to appraisal standards.
FHA Streamline Net Tangible Benefit
For borrowers who have an FHA loan, an FHA streamline refinance allows them to refinance the loan without income or an appraisal. A tangible net benefit must be met, and a worksheet is to be filled out in underwriting. For qualifying homeowners, they may be eligible for a lower mortgage insurance rate.
When the term is not being reduced, the net tangible benefit depends on when choosing a fixed rate or ARM:
|
Current Rate |
New Rate – Fixed |
New Rate – ARM |
|
Fixed |
The total combine rate must be 0.5% lower than the current rate. |
The new combined rate must be at least 2% lower than your combined rate. |
|
ARM |
The combined rate cannot be more than 2% of the previous combined rate. |
The new combined rate must be at least 1% lower than previous rate. |
When reducing the term, the term must be reduced by at least three years and the following three factors must occur:
- The combined principal, interest, and mortgage insurance cannot be more than $50 than the previous payment.
- The new combined rate must be lower than the previous combined rate for fixed to fixed streamline refinances.
- Going from an ARM to a fixed must be no more than 2% of the previous combined rate.
VA Net Tangible Benefit
Guidelines for VA IRRRLS (streamline) were put in place to protect veterans from predatory lending. For an IRRRL that results in a lower principal and interest payment (P&I), the recoupment period for fees, closing costs, and expenses (other than amounts held in an escrow account) cannot exceed 36 months from the date of closing. This does not apply to an IRRL that results in the same or higher monthly P&I payment, but no fees and closing costs can be charged.
- Fixed to fixed rates must be no less than 0.5%.
- Fixed to adjustable rates must be no less than 2%.
Other Refinancing Options for Homeowners
Most lenders limit themselves to offer only conforming and government loans. Non-QM loans allow borrowers to qualify with alternative income such as bank statements or property cash flow. For example, no ratio and debt-service coverage loan for investment property will consider the following equation instead of personal income:
Rent / (Principal and Interest (P&I) + Taxes + Insurance + Home Owner’s Association Dues (HOA)) = Debt-Service Ratio
Non-QM loans even allow non-traditional property types. Financing is made possible even for condotels, more than 4 units, and non-warrantable condos. Rehab loans allow borrowers to finance properties that do not meet traditional appraisal requirements.