Net tangible benefit sounds scary, doesn’t it? It sounds like you need something very important in order to qualify for the FHA Streamline loan, but in reality, it is a simple requirement. The FHA needs to know that not only will you benefit from the streamline refinance, but that they will too. Because the FHA insures every loan that they approve, they cannot be too careful in determining who gets a loan and who does not.
Qualifying with the Net Tangible Benefit
Net tangible benefit is a word used on several loan programs and it means something different for each one. In this case, on the FHA Streamline, it means that your new loan payment is at least 20 percent lower than your current payment. This is because the idea behind the streamline program is to make your payment more affordable. While 20 percent sounds daunting, it can be done with a 0.5 percent lower interest rate between the actual interest rate on the loan and the MIP rate charged on the new FHA loan.
It can also mean something else, however, if you are in a special circumstance including:
- You currently have an adjustable rate mortgage
- You currently have a longer term than you are going to refinance into
In these two cases, your payment will not likely decrease, or if it does, it will not equal 20 percent. Because a fixed rate is less risky than an adjustable rate and a shorter term is less risky than a longer term, though, they both qualify as a benefit for this program.
How to Reach the Net Tangible Benefit
So how do you reach that net tangible benefit? There are a few ways:
- Refinance into a lower interest rate on a fixed rate loan
- Refinance from an adjustable rate to a fixed rate (the new rate cannot be more than 2 points higher than the current rate)
- Refinance into a lower term, such as a 15-year instead of a 30-year term (the new rate cannot be higher than the current rate)
The lender will help you determine if you reach the benefit based on the current interest rates or on the situation your new loan puts you in. Something to keep in mind if you refinance from a 30-year term to a shorter term is that your payment will increase, so the lender will need to determine if you can afford it, looking closely at your debt ratio and possibly your credit score, which is not typically a part of the FHA Streamline requirements.
How the FHA Streamline Benefits You
By looking at the net tangible benefit, you can see how the streamline program can benefit your situation. A lower payment is obviously a no-brainer as it is easier to afford. Refinancing from an adjustable rate to a fixed rate can also have incredible benefits, however, as you no longer have to deal with the yearly adjustment periods which could send your payments skyrocketing with very little notice. A shorter term is also beneficial, although you will likely not realize the benefit until you pay the loan off as that will come much sooner than the longer term. In the end, you stand to save thousands of dollars of interest by paying the loan off in a shorter amount of time.
The net tangible benefit on the FHA Streamline program helps you determine if refinancing is the right choice for you. It is also a guide for the lender to determine if it is the right choice because you will have to pay closing costs and addition upfront mortgage insurance in order to fund the loan. If the benefit is there, however, paying the new insurance is worth it so that you can better afford your