In recent years many financial advisors have risen to prominence, perhaps as a direct result of the advent of more easily obtained credit, followed by the oppressive “Debt Culture” that now manifests as one of the worst recessions on record. And while the specific debt management and wealth building strategies made popular by Suze Orman, Dave Ramsey, Robert Kiyosaki or any of the other financial gurus out there vary distinctly, there is one fundamental financial strategy that they all seem to agree on; moving higher interest rate debt into lower interest rate debt saves money. In keeping with this fundamental tenet of financial freedom, if we can agree that ultimately what matters most is how much money comes in each month and how much goes out, then even if you currently have a fantastically low rate on your VA home mortgage, if you also carry balances on revolving debt (credit cards, lines of credit, etc.) at a higher interest rate than your VA mortgage, it may be time to consider a VA Debt Consolidation Loan or “Cash Out” refinance.
The VA Cash Out refinance can best be describe as a VA guaranteed refinance program for borrowers with existing VA mortgages OR those in conventional (non-VA) loans with existing eligibility. Because the loan, by definition requires the increase of the loan amount due to the rolling in of debt, it requires qualification similar to a full “documentation” loan similar to the VA purchase loan. This includes considering:
· Appraised Value / LTV (Loan to Value = the appraised value of the home / loan balance)
· Credit Scores & Debt Obligations (How much of your income is spoken for each month by credit payments, etc)
· Income (Do you have steady employment over the last two years? What is your gross household income?)
· Assets (Do you have any liquid / semi-liquid savings of any kind that prove your ability to save?)
If these basic requirements can be satisfied, the VA will guarantee loans up to 100% of the value of the home, though (currently) most lenders will not lend beyond 90% Loan to Value. The benefits are obvious, including the following:
· Debt Consolidation
· Home Improvement
· Competitive Rates, Favorable Terms,
· No Mortgage Insurance, even if you borrow over the customary threshold of 80% of your homes value.
· Defer mortgage payments and receive an escrow refund to free up immediate cash before making first payment
· Retaining VA loan status gives borrowers ability to take advantage of VA Streamline Refinance (IRRRL) if rates drop.
I recently closed on a VA debt consolidation loan for a veteran who had the following scenario:
· $225,000 VA Mortgage at 4.5% with a payment of $1600 per month (including taxes and insurance)
· Credit Card debt, totaling (over 5 cards) $32,000 and costing him $850 a month in minimum payments
· Income of $5500 a month with debt obligations totaling $2400 per month
At first, this borrower seemed fundamentally opposed to the idea of refinancing his mortgage, citing the fact that he had secured a 30yr fixed rate that he believed he would never be able to acquire again since rates had risen. He became much more receptive once I pointed out that it made no sense for him to have a mortgage of $225,000 costing $1600 a month when his credit payments on $32,000 were totaling more than half his mortgage payment and (unlike the mortgage) brought him no closer to paying down the balances.
Once we were able to get all the documentation settled, I was able help this veteran roll in all of his credit debt, and get additional money out for a home improvement project he had been considering. All told, when everything was said and done, we had helped him get into a loan at $270,000 on a fixed rate with payments at $1850 per month – a permanent savings of $550 per month. Over the life of the loan this will translate into a savings of $198,000.
Though I suspect the savings reflected in the above example might be the most compelling way to close out this post, I will instead end with an invitation. If you are a veteran homeowner and would like to know if there is any possibility that a refinance like this can help you save money, don’t hesitate to call James Shergill at 877-698-2482 to find out more. At the very least you will emerge from our brief discussion with a clearer understanding of your options. At best, you will save a great deal of money and take a giant leap forward toward financial freedom.