Let’s talk about S. 2155, “The Economic Growth, Regulatory Relief, and Consumer Protection Act” and the Veteran.

Buried deep (Section 309) in this bill (now law) are a couple of provisions that directly impact veterans with home loans (or veterans who will be getting home loans).

First, there’s a “Net Tangible Benefit Test” in which:

all of the fees and incurred costs are scheduled to be recouped on or before the date that is 36 months after the date of loan issuance

What does this mean? 

Essentially, to refinance a VA loan, the total cost of the refinance must be less than or equal to the cost of the refinance over 36 months.

Is this a bad thing? 

I submit that it is not. It protects the veteran from paying potentially extra dollars in fees. VA streamline refinances are often sold as “not having to pay anything up front to lower your payment!” This is true but there is a cost. That cost is added to the mortgage balance and reissued for 30 more years. This test imposes a test to make sure the veteran isn’t being taken advantage of in the form of higher fees.

Won’t this make it harder to refinance?

Potentially. However, it’s also going to put pressure on lenders to contain the VA refi costs.

The second provision address the minimum interest rate reduction:

in a case in which the original loan had a fixed rate mortgage interest rate and the refinanced loan will have a fixed rate mortgage interest rate, the refinanced loan has a mortgage interest rate that is not less than 50 basis points less than the previous loan

In short, these means the new loan will need to be approximately .5% lower than the previous loan. As with the test above, this doesn’t  necessarily harm the veteran.

There’s long been a mantra in real estate – a rule of thumb – that suggests “It’s good to refinance if you can drop the rate 1% or more.” As a rule of thumb, this is good advice (but always run the numbers). It seems this provision codifies this rule of thumb into law in the form of “A veteran may not refinance unless the new interest rate is .5% or lower.”

Taken together, these provisions essentially state:

A veteran may not refinance unless the new interest rate is .5% or lower and the fees for the refinance are recoupable inside thirty-six months.

In sum, I submit these provisions are likely going to have the effect of protecting the veteran from being sold a product that is high cost for marginal gain.