Wall Street Lies to Military and Veterans
This 15 minute video will educate you on the truth about the VA hybrid loan and how you can use it effectively as a Veteran or Military home owner. This video will change the way you look at loans and how much our society has been misled when it comes to 30 yr fixed rate loans. Enjoy
Many first time veteran home buyers find themselves at a loss as they negotiate the loan process. I’ve created a comprehensive, yet (hopefully) easy to follow overview of the major terms and concepts you many encounter.
LOAN TYPES
There are two basic loan types – VA Fixed Rate mortgages and VA Adjustable Rate Mortgages or VA HYBRID ARM’s. VA Fixed Rate mortgages are fixed for the entire term of the loan and are the most secure loans. The term can be anywhere from 10-50 years depending on the loan program but 95% of the time are fixed for a 30 year term. These are best for veterans on fixed incomes and for veterans who plan on being in a property for either an extended or indeterminate amount of time and have no plans to refinance.
Since most veterans know that they will either sell or refinance their home well before end of the 30 years, many individuals choose adjustable rate mortgages. VA HYBRID ARMs can come in a variety of terms, depending on the loan product but are for the most part also based on 30 year terms. However, VA HYBRID ARMs have an introductory fixed rate period ranging from 3-5 years at a lower rate than those of a 30 year fixed loan. In exchange for the benefit of a lower interest rate, once the fixed rate period ends the loan will adjust to the current market conditions of that time.
It is a common misconception that when the Fixed rate period is up the loan rate will automatically increase. The loan will adjust according to the rate of the 1 year Constant Maturity Treasury Index (1yr CMT) + a fixed margin (usually 1.75-2.25%) which is determined at the inception of the loan. Let’s you had a 5 year VA HYBRID ARM at 7.5% with a margin of 2%. When the Fixed rate period is up after 5 years, if the 1yr CMT was at 4% then the interest rate on the loan would actually drop to 6%. Conversely, if the 1yr CMT at that time was higher, say at 6%, the rate would go up to 8%. Regardless what the 1yr CMT is at when the VA Fixed Rate ends, all VA HYBRID ARM’s have built in rate adjustment caps that limit how much the rate can change each month, year, and over the remaining life of the loan.
VA HYBRID ARM’s and VA Fixed Rate loans refer only to the interest rate on a loan. The terms Amortization and Interest Only refer to the payment schedulebased on this rate. Both VA HYBRID ARMs and VA Fixed Rate Loans are amortizing loans, although I will cover interest only loans as well to be thorough.
AMORTIZATION TYPES
Amortization refers to (with regard to mortgages) the repayment of the balance of the principle amount borrowed over a specific term. As mentioned earlier, loans have many terms and can be amortized over any of them. The key to understanding amortization is that it refers to a loan that is being repaid over the term of the loan. Banks “front end load” their loans in order to maximize their interest return. At the start of the loan, the bank calculates how much interest the rate they have locked you at will generate for them across the entire amount of the loan. When they receive your monthly payment, instead of equally distributing the payment to the interest due and toward reducing your balance, banks load the majority of the interest owed over the life of the loan into the first 10 years. Within the first year of a 30 year loan, the vast majority of the payment is going to pay the interest on the loan with very little actually going to pay down your principle balance. In the last year of the loan then, the majority of the payment will be going to pay down the balance, having paid the bulk of the interest calculated over 30 years in the first 10.
Interest Only loans are simply loans that do not amortize for a fixed period of time. On a 30 year interest only loan with a 10year interest only period, you will only be required to pay the interest due on the loan for the first 10 years. You will make no contribution toward principle. The interest you pay each month for the first 10 years is simple interest calculated by multiplying the balance (e.g. $100,000) times the interest rate (e.g. 6%) divided by the 12 months of the year. ($100,000 x .06 = $6000 , $6000 / 12 = $500+TI per month monthly payment for the first 10 years) By contrast, a $100,000 30 yr VA Fixed Rate amortized mortgage at 6% would be $599.55. Sure you might not be paying down your balance with an interest only loan but consider the following – you could take the $99.55 per month you were saving by not choosing an amortizing loan and:
Putting money toward your home is beneficial only if it is contributing to a lower payment. Many veterans believe the interest they pay over the life of the loan reduces as their balance does over time. This is not true. It only appears that way. Because of the way loans are structured, the amount of interest you pay over the life of the loan is based of the original NOTE amount or principle balance. This interest you actually pay is the “front-end loaded” interest calculated on this original amount. So this means the only way you will lower your payment on most mortgages is by refinancing and paying off a portion of the remaining balance owed in a lump sum, thereby reducing your future payments on the new loan with a smaller balance and NOTE amount. By putting your savings away on an interest only loan as described in the 6 month CD example, you could actually pay down your balance faster than an amortizing loan of equal rate. Whenever you refinance, simply take the amount saved by making the I/O payment + the interest you have earned on in and use it to pay down your remaining balance. Putting money toward the equity in your home isn’t really safe anyway. Imagine if you took the $99.55 per month saved and put it toward your balance each month. If the property depreciates, that money is gone. If you had been saving it in a risk free, interest bearing investment, you not only have the money you would have lost but all of the interest earned as well.
CLOSING COSTS
The amount of VA loan closing costs you pay will be directly proportional to what rate you decide on. The general rule is: The higher the VA interest rate, the more projected interest the bank will make on you, the more flexibility the bank has to cover and or waive closing costs. You can choose to lock into rates even below prime if you choose to, but the bank will ask you to pony up with a commensurate amount of prepaid interest to “buy-down” your interest rate. It follows then that these fees are sometimes called “discount points”.
CONCLUSION
I hope this has been a helpful overview of the loan process and some of the key terms you may encounter. Feel free to check out some of my other posts (Linked Below) on specific VA loan products including the VA Hybrid ARM.
http://www.lowvarates.com/va-loan-blog/how-about-the-va-hybrid-arm/
http://www.lowvarates.com/va-loan-blog/veterans-need-to-take-advantage-of-the-va-hybrid-loan/
Feel free to contact me any time with questions:
James Shergill
888-657-2848 ext 252 Toll Free Office Line
650-605-3638 Mobile
I do not view myself as salesman. I think the secret to “selling” a loan or anything else for that matter is simpler more honest than many may think. If I do nothing more than push an interest rate, then “I” am not selling anything; only the rate is. Too often many of us are conditioned to chase low interest rates simply because the perceived wisdom tells us to. In fact, there is no “one size fits all” loan program, rate or fee structure. Realizing this, helps us better serve our VA loan clients, helps our veteran clients make more sound decisions, and establishes a relationship of trust between the veteran and their loan officer.
I can see how reading this title at first might lead one to think this post was meant for people who work with or for me. I share this here to give my veterans an insight into my personal philosophy and how when it comes to giving a veteran the best deal and best service I can, our interests are more closely aligned than one might think.
The following then represents the steps I take on every VA loan.
1. Get the data and identify the veteran. This information gives a context to a veteran’s motivation for investigating a loan. Sometimes a veteran is unaware of the best option or, in some cases, convinced an alternate option is better than what you suggest. This helps frame basis of your advice. Questions might include: How much debt do you have, how much do you owe on the home, what is your payment.
2. Find out the veterans goals – This can be open ended: What are your intentions with a potential VA refinance? Or pointed requiring a yes no answer:
· “Are you looking to free up money to pay down other debts?”
· “Are you looking to free up money to supplement your income?”
· “Are you looking to pay the home off faster?
3. Check the time – “What is the minimum amount of time that you are sure you will own the home?” This question provides scope to the mortgage options you present.
4. Run the numbers & create a plan – At its most essential, a refinance is an investment. You agree to pay/add a certain amount of closing costs in exchange for an incremental savings over time. When the cumulative amount you have saved has equaled the costs of the refinance, you have achieved the “breakeven point” in the loan. From this point forward any savings experienced are now “true” savings. The optimum quote will be one where the loan program, rate and fee combination saves the veteran the maximum amount of money between the “breakeven point” and the end of the length of time they were sure they would own for.
5. Identify the risk – By determining the potential risk, advantages and drawbacks of the various options available you alleviate unknowns. Unknowns create uncertainty, and uncertainty prevents good decision making. A fixed rate loan is often thought to be the safest loan available, but not necessarily for someone who has a large amount of higher interest rate credit debt. By taking a VA Hybrid ARM, the veteran might save significantly more. Since credit cards calculate the interest rates on the ending monthly balance, the faster one pays off credit card debt, the more money they free up each month. I have often been able to show veterans how paying off credit card debt faster can free up enough money to offset the maximum “worst case” rate/payment they could ever reach on the loan.
6. Clarify details and explain the options – encourage the veteran to ask questions. It is often the case that veterans object to the Hybrid ARM simply because it is an ARM. To disregard all ARM loans simply because of the ARMs with unfavorable terms that have hurt many homeowners is like refusing to ever drive a car simply because Toyotas are currently being recalled.
7. “You sell ME.” – If a loan officer has completed the preceding steps perfectly, then a sale is no longer the issue. Once you have devised a plan that best meets their goals, mitigates their fears and ultimately saves them the most money, you are talking about common sense. Though I don’t directly ask this of my veterans, my philosophy is “you sell ME as to why you shouldn’t do this.” In my experience, following these steps through with this approach helps the veteran arrive at a clear and meaningful decision.
Veterans have many loan options and there are many lenders and brokers who they could work with and may even be able to offer the same deal you can. Following these simple rules help me to distinguish myself among the choices, and hopefully earn their business.
I’ll admit it with a twinge of shame, I’m a particularly frugal guy. I prefer to buy most of my stuff in bulk (At Costco or Sam’s Club) and break it down using my Foodsaver to minimize waste. Almost all of my light bulbs are fluorescent, and I just recently applied a tinted film for my downstairs windows to block the glare and insulate better. I buy most of my clothes from the sale racks, I’ll frequent Ross and hold out for sales when I go to regular stores. I prefer eating out with a coupon, but if I don’t, you’ll often catch me ordering from the dollar menu.
This guy knows how to stretch a dollar. I know there’s folks even more hard-core than I am, to the extent of making their own laundry detergent; but I digress…
Saving money is always a priority of mine. “Waste not, want not” and “A stitch in time saves nine” were the types of phrases that struck with me when I decided early on that I wasn’t a fan of needless expenses. Buyer’s remorse has taught me well enough and early on, it pays to shop around. But don’t get me wrong, I love spending money… my approach just allows me to spend more of it in the long run.
Over the years, I’ve found some great ways to save green, and although some of this comes from my personal experience – most of it didn’t address how Veterans in particular can save money. Needless to say, a lot of these results came from my own research in finding out just how much better you can benefit financially when you apply the advantages of a Military Service record. Your dedicated service came at a price, but it also came with a load of benefits to show America’s appreciation for our armed forces. The following list of five are the top benefits I have found for Active-duty and retired members of the US Military.
1. Education
If there’s any sure way of getting more bank for your buck, it’s in higher education. This is one of the best investments you can make in your future. Former servicemen and women may find that their experience, training and discipline will give them a leg-up on the rest of the general student body in pursuing a degree. The best part about it though, is that through the GI bill it’s not much of a burden in getting started. Many private and public universities have counseling departments specialized in assisting Active Duty Military and Veterans in finding ways to finance or subsidize their education. Look at it this way, Uncle Sam is willing to fund your education for one big reason… he’s counting on you to make more money with a degree than you would have otherwise, and through the income taxes you’ll pay on your higher income, your subsidized education will have paid for itself. There is a strong correlation with the opportunities open to a job candidate and the level of education he or she has attained. In any case, this is one sure way you can improve the general quality of life for yourself and your loved ones.
other sites:
2. Healthcare
For many veterans, the subsidized health care ended shortly after active duty. For many others, it will continue on for life. If any part of your healthcare cost is subsidized by the US Government, you will want to take advantage of all benefits it has to offer. Healthcare is a cost that is only increasing with time, and with many fears that the Medicare system could potentially be bankrupt within 10 years, one must feel lucky to have some of these costs covered by Uncle Sam.
This doesn’t just mean using your benefits to head off to the ER once your steak and french fries diet has caught up with you; this means going in for annual physicals, getting your blood pressure, cholesterol, and other things like bone density tests, melanoma biopsies and prostate exams. Benjamin Franklin once said “An ounce of prevention is worth a pound of cure.”
Making the necessary changes through preventative medicine to avoid diseases like cancer, heart disease and diabetes is all something you can start on NOW, and it will be cheaper than treating the disease later. Personally speaking, I’ve enjoyed employer covered insurance, but at the present time, I am self-insured. My rates are better than many men my age, but the prohibitive cost still makes me think twice on whether or not a doctor’s visit is necessary. If any part of your healthcare is free, seize the opportunity!
3. Financial Benefits Assistance
There is a myriad of associations and resources in helping veterans to get the most of the benefits guaranteed them by the Department of Veterans Affairs and the U.S. Government. Sometimes, one must work with assistance to navigate the difficult and cumbersome systems required to obtain full benefits. The following sites appear to have a theme centralized on helping Veterans capitalize on the benefits to which they’re entitled.
For those who qualify for the VA Loan or the VA IRRRL/Streamline line, the benefits are obvious; especially when compared to conventional and FHA loans. For starters, the VA Loan is one of the only loans that will allow you to borrow up to 100% loan-to-value. The VA loan does not require mortgage insurance, and offers 30 year, 15 year, and Hybrid rates. One of the sweetest benefits of the VA loan is the Streamline Program, which allows borrowers to refinance their home without having to re-qualify with assets, income, debt, and value calculations. No appraisal is required, and closing is always nothing-out of pocket. Although some restrictions apply, this loan offers options where thousands of traditional homeowners would otherwise have none. Flagship is a specialist in the VA’s lending program, and is one of many entities in helping Veterans to take advantage of all their benefits provide.
other sites:
Military Officers Association of America
4. Travel
I had no idea about this, but apparently Veterans can travel on the cheap. You will have to inquire with most of the major Airlines directly to determine if they have discounts offered (seasonal) for our Veterans. Many cruise lines like Carnival also offer discounts for Military as well. Amtrak offers 15% discounts, and even Greyhound offers a 10% discount to Military and their family. Most travel search engines do not have a Military discount option built-in, so your best option is to do your travel shopping with the regular search engines, and then see what type of rates you can pull up from the various institutions that come up in a Google search on military travel discounts.
other sites:
http://www.aarp.org/leisure/travel/articles/greenberg_veterans_cruise_discounts.html
http://www.bestfares.com/cruiseMilitaryRates.php
5. Retail
I’m a big fan of getting things on sale. I’ll never go to Bed Bath & Beyond without the 20% coupon they send me every month. Last night, I found a deal on a computer monitor at Staples that was not only on sale, but had a $25 coupon I could apply at checkout, all thanks to a great website I found while researching this article – The Top 10 Money Saving Sites. Now, that’s a website that anyone can use, but one website in particular stood out, Veterans Advantage – because it caters directly to Military and their Families, much the same way USAA caters banking and insurance to our Veterans.
Here’s a quick summary of what membership with Veterans Advantage includes:
For most of us, the cell-phone discount itself would pay for the membership, not to mention the other hefty discounts offered in travel and retail.
another great site:
Military Discounts and Deals at MilitarySpot.com
Nobody is immune to the effects of our recent economy. Anyone resourceful enough and patient enough can save a whole lot of money, but it’s clear that with a little more digging, today’s Veterans can find ways to save even more than the typical American. I’ve always known about the VA Loan and it’s superiority in providing options to borrowers including those with difficult circumstances. It’s great to know that beyond the VA Loan, that there are numerous options available to our dedicated servicemen and women to get more for their money. I hope you find this list helpful in getting the most bang from your buck.
