Refinancing a mortgage must make sense…and by “make sense” I mean to the lender receiving the application. For refinance transactions, lenders require that the loan provide a documented “Net Tangible Benefit” to the client.
Lowering interest rate and/or payment, or taking cash out are popular reasons for refinancing. Others include adding or deleting someone to the title to the home, adjusting the loan term, etc. All these are acceptable but, for refinances to lower rate and/or payment, it must make sense mathematically.
Many loan costs are fixed regardless of loan amount but loan amount greatly influences net tangible benefit in refinance transactions. For example; with a current balance of $600,000, and a new rate at a half percent lower than the current rate, tangible benefit exists. Typical costs for such a loan amount would be in the $5,000 range and a half percent reduction saves about $3,000 in annual interest. Breakeven occurs in less than two years.
However, with a $90,000 loan balance, even at rate lower by a full percent, annual interest reduces only $900 and with costs for such a loan likely in excess of $2500, even though it might pass “Net Tangible Benefit” requirements, it makes less sense considering a break even period of almost three years.
It’s a loan agent’s job to help clients make sound mortgage financing decisions and because that hasn’t always happened, “Net Tangible Benefit” documentation is now required. If a transaction provides no real benefit to a client, it’s a loan agent’s responsibility to explain as such.