The VA IRRRL program makes it easy to refinance. With verification of your loan payment history and proof of a net tangible benefit, you are on your way to a refinance. But, just what is a tangible benefit? How do you prove it to the lender?
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The Net Tangible Benefit Defined
The net tangible benefit is some type of benefit that you receive by refinancing. The VA wants to make sure you aren’t refinancing just because you can. They want to see that there is some type of benefit. The most common benefit is a lower payment. Saving money is a good thing and the VA stands behind that. But, that’s not the only benefit that will get you approved. You can also:
- Secure a shorter term – A shorter term means that you hold onto the bank’s money for less time. This is a smaller risk for the bank because they can actually get paid back and be able to lend the money to others quicker.
- Refinance out of an ARM – Adjustable rate mortgages are risky. The fact that the rate can adjust puts you and the lender at risk. If you want to refinance into a fixed rate loan, the VA considers that a benefit even if your loan payment doesn’t decrease.
Proving the Net Tangible Benefit
In order to prove the net tangible benefit, borrowers must sign a Rate Reduction and Comparison Statement. This certifies that there is a benefit for the loan and shows that you understand the consequences of refinancing.
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On the statement, you will provide your case number, mortgage amount, and interest rate. You will then enter the information from the new mortgage in order to compare the two loans. In addition, you’ll need to provide:
- The Note from your mortgage
- A mortgage statement or payment coupon
With these documents and the signed statement, the lender can determine if there is a benefit for the refinance.
Why the VA Cares
The VA and VA approved lenders want to know that there is a benefit for the refinance because it will cost you money. It also resets your term unless you choose a shorter term.
The VA wants to know that the several thousand dollars in closing costs is worth spending. If it’s not, you could use that money towards your loan and pay it down faster. They have your best interests in mind, so even when it seems crazy that they need to know the benefit, it’s for your own good.
Another way you can protect yourself with the refinance is to figure out the break-even point. This is the point that you pay off the closing costs and start realizing the savings. If the break-even point is more than a few years, it may not be worth your time and money to refinance.
Putting all of the pieces of the puzzle together, you can determine if the net tangible benefit is enough reason for you to refinance with the VA IRRRL. It is one of the easiest programs around to help you refinance, but it shouldn’t be abused. If you already refinanced once, you may want to leave the loan alone. The more you refinance, the longer it takes to pay the loan off and own your home free and clear. Of course, if the benefit is large enough, though, it can be a great way to save money.
