When you do an FHA streamline refinance, there must be something in it for you. This is called the net tangible benefit which is “a reduced combined rate, a reduced term or a change from an ARM to a fixed rate mortgage that results in a financial benefit to the borrower.” The showing of a net tangible benefit is an important, indispensable element in any
FHA streamline refinance.
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Reduction in Combined Rate
For starters, the lender is tasked to determine if a streamline refi loan will result in a reduction of the combined rate. The latter is defined as the mortgage interest rate plus the rate on the mortgage insurance premium (MIP).
Take a look at the net tangible benefit requirements with respect to the combined rate on the following transactions:
1. Fixed-rate mortgage to
- Fixed-rate mortgage: the new combined rate must be at least 0.5% below the previous combined rate.
- One-year ARM: the new combined rate must be at least 2% below the previous combined rate.
- Hybrid ARM: the new combined rate must be at least 2% below the previous combined rate.
2. ARM less than (<) 15 months to next payment change date to
- Fixed-rate mortgage: the new combined rate must be no more than 2% above the previous combined rate.
- One-year ARM: the new combined rate must be at least 1% below the previous combined rate.
- Hybrid ARM: the new combined rate must be at least 1% below the previous combined rate.
3. ARM with greater than or equal to (≥) 15 months to next payment change date to
- Fixed-rate mortgage: the new combined rate must be no more than 2% above the previous combined rate.
- One-year ARM: the new combined rate must be at least 2% below the previous combined rate.
- Hybrid ARM: the new combined rate must be at least 1% below the previous combined rate.
Reduction in Term
The above requirements on combined rate reduction, as applicable, do not apply to streamline refinances seeking to shorten the loan term.
For a “reduction in term” to result in a net tangible benefit, it must meet all of these conditions:
- The existing loan’s remaining term will be reduced;
- The new loan’s interest rate will not exceed the existing loan’s interest rate; and
- The new mortgage’s combined principal, interest and MIP payment will not exceed the existing mortgage’s combined principal, interest and MIP payment by more than $50.
Change From ARM to FRM
Understandably, a refinance from an adjustable-rate mortgage product to a fixed-rate mortgage product is a move to stability. Fixed-rate mortgages have the same rate locked throughout the loan’s term, thus the monthly principal and interest payments are the same.