The Net Tangible Benefit (NTB) rule is a regulatory requirement designed to ensure that borrowers receive a tangible advantage from refinancing their Adjustable-Rate Mortgage (ARM). One of the critical aspects of this rule is the 3-year requirement, which mandates that the refinancing of an ARM must provide a clear financial benefit to the borrower within the first three years.
The NTB rule requires that the new loan must offer an improvement in terms like a reduced interest rate, lower monthly payments, or a more stable mortgage product. This rule aims to protect borrowers from refinancing into loans that do not offer significant financial advantages.
Imagine a borrower with an existing ARM having a 4.5% interest rate. If they choose to refinance to another ARM, the new loan must offer a clear benefit, such as a reduced rate or payment, within the first three years. For example, refinancing to a new ARM with a starting interest rate of 3.5% would meet the NTB rule as it lowers the interest rate by 1%.
This rule is essential to ensure borrowers aren't lured into refinancing with short-term benefits that may lead to long-term financial strain. The 3-year requirement helps to ensure that the refinancing decision is financially sound for the borrower in the longer term.
It's advisable for borrowers to consult with mortgage professionals to understand the implications of refinancing under the NTB rule and to ensure that any refinancing decision aligns with their long-term financial goals.