For example, in cases where borrowers use a cash-out refinance to pay down higher interest rate consumer debts (e
A shorter-term loan will be in the borrower’s financial interest as the borrower will be paying off the loan in a shorter amount of time
For the reasons explained above, VA will require that the new loan must provide a net tangible benefit to the borrower. For the purposes of § , net tangible benefit means that the new loan is in the financial interest of the borrower.
First, the new loan must meet one or more of the following: The new loan eliminates monthly mortgage insurance, whether public or private, or monthly guaranty insurance; the term of the new loan is shorter than the term of the loan being refinanced; the interest rate on the new loan is lower than the interest rate on the loan being refinanced; the payment on the new loan is lower than the payment on the loan being Start Printed Page 64463 refinanced; the new loan results in an increase in the borrower’s monthly residual income as explained by § (e); the new loan refinances an interim loan to construct, alter, or repair the home; the new loan amount is equal to or less than 90 percent of the reasonable value of the home; or the new loan refinances an adjustable rate loan to a fixed rate loan.
VA has chosen these eight criteria because VA believes a loan that meets at least one of these criteria helps demonstrate that the loan is in the financial interest of the borrower. For example, a lower interest rate, a lower payment, or elimination of monthly mortgage insurance will be in the financial interest of the borrower by reducing the debt service the borrower must cover each month. In payday loans in Maryland many cases, lowering the interest rate or reducing the monthly payment through elimination of monthly mortgage insurance will also decrease the overall cost to the borrower over the life of the loan. In cases where the monthly payment is lowered but the overall cost of the loan will increase (e.g., borrower refinances an existing loan with five years’ worth of payments remaining into a new 15-year loan, takes $20,000 in cash out, and realizes a reduction of only 50 basis points), VA believes that the refinance loan may still be in the borrower’s financial interest, as the veteran might need access to cash for certain expenses (e.g., home repair for livability, medical bills, or educational expenses). Additionally, VA notes that the loan comparison disclosure mandated by this rule, and discussed in more detail below, will provide the borrower with upfront information about the overall cost of a loan, thereby helping the borrower make an informed decision about whether to proceed with the refinance loan.
Given that all cash-out refinance loans must be fully underwritten and the borrower must demonstrate an ability to repay, VA sees little downside to a borrower who chooses to refinance his or her loan to a shorter term, as a borrower will most likely end up paying less interest over the life of the loan.
The lender of the new loan must provide the borrower with a net tangible benefit test and that test must be satisfied
VA also finds that a new loan resulting in an increase in the borrower’s monthly residual income as explained by § (e) will be in the financial interest of the borrower by providing additional liquidity to the borrower. g., credit cards and automobile loans), borrowers use the equity in their home to consolidate debts at a lower interest rate, which results in a lower monthly debt-to-income ratio.