FHA describes a net tangible benefit as a reduction of principle, interest, and mortgage insurance payments by 5%. Most FHA mortgage holders typically save a bit more than that, but for the sake of discussion let's make it easy.
For many FHA Homeowners, a 5% reduction in their mortgage equates to about a 1.5% increase to their income. It's true! No one would turn down a raise would they?
Now let's look at the totals. There are about $575 Billion in outstanding GNMA (Government National Mortgage Association) loans which are comprised of FHA and VA mortgages. If each of the payments on those mortgages were to be reduced by 5%, it would result in aggregate savings of approximately $1.8 Billion per year. That's $1.8 Billion back in the pockets of everyday homeowners, instead of sitting in the coffers of banks, bond holders, and Wall Street traders.
Is the 5% rule perfect? No, in fact, like most rules it has limitations and imperfections.
It doesn't account for cost. Some may be denied for an FHA Streamline Refinance with absolutely no costs at all because it only reduces the payment by 4.99%. In contrast, others may be approved for a loan with exorbitant closing costs that saves 5.01%.
It doesn't allow for shortening the term of the mortgage. Some homeowners would likely see a real benefit in reducing their 30 year loan to a 15 year mortgage with a very modest increase to their payment, but not with the modern streamline program.
It doesn't account for those with FHA ARMs (Adjustable Rate Mortgages) to be able to lock in a fixed rate. For example, a homeowner with a 4.5% adjustable rate due to adjust this year may not be able to streamline into a 4.5%, or 4.25% fixed rate because they won't meet the 5% payment reduction threshold.
Are there any other Net Tangible Benefits? While the 5% rule is all that HUD seems to be concerned with, there are many other benefits.
Everyone understands that lower rates generally equal lower payments, but most overlook the fact that a lower rate also results in a larger portion of the payment being applied to principle, building equity faster.
The mortgage insurance will also terminate sooner rather than later. FHA Mortgage Insurance cancels when the loan to value ratio (LTV) reaches 78% of the original mortgage balance. This happens much faster with a lower interest rate. It is somewhat common to reach the 78% threshold 1-4 years early.
Many borrowers are permitted to skip a mortgage payment in the process, without penalty.
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