Advertisements for VA loans are everywhere.  You hear radio ads, TV commercials, and if you have a VA loan already, your mailbox gets filled every week with solicitations. If rates click down just a notch, there’s a massive pile of mail screaming for your attention!  Is this stuff for real?  There’s just an avalanche of it with bold claims of “lower rates.”  Why does it seem as if having a VA loan makes you a target for solicitors?  Where do these people who call you get your number from?    Should you respond to any of these offers?  

Refinancing, by definition, is simply replacing old financing with new financing (a new mortgage) because the new terms are more favorable to you.  In the money game, it’s the ultimate do-over, a second (or third or fourth…) chance to take advantage of a new opportunity.   Homeowners with VA home loans consider refinancing for a variety of reasons, including to obtain a better interest rate, to reduce monthly payments, to consolidate debts by paying off credit cards, or to free-up cash, often for home improvements.  There are four reasons to refinance:

Homeowners who purchase a home using their VA Home Loan Benefit often don’t understand the compelling reasons to refinance.  They may be skeptical of all the solicitations.  Or they may have had a bad experience getting their purchase loan.  Or they maintain a stubborn stance because they simply don’t want to “start all over again” with a new loan because their goal is to pay off the debt, pure and simple.  This is the biggest mistake.  There are a host of reasons creating resistance when it comes to refinancing and preventing our men and women who serve from taking advantage of a bona fide, legitimate opportunity to achieve better terms on a new loan.  This is especially true as it pertains to a “fixed rate to fixed rate” refinance.  

It’s very common for a buyer to purchase a property with a fixed rate and then come up with a list of objections as to why they will not refinance to a lower rate.  Unfortunately, many of these objections are “self-invented myths” that prevent our VA borrowers from improving their financial situation.  Often the improvements can be life changing with respect to properly managing their finances.

This situation is very familiar to us at So Cal VA Homes.  We have tracked the data and seen the evidence.  There exists a group of about 5000 home owners with VA loans across the state of California who bought their homes between 2007 and July of 2011.  This specific group of VA borrowers all have the same original financing.  They still have the same purchase loan that helped them buy the house.  During that time, 30 year fixed rates averaged about 5.50%.  Since that time frame, rates dropped to as low as 3.00%.  For the years between 2011 – 2015, “no points, no fees” refinance opportunities existed at 3.75%.  There has been more than enough opportunities for at least some of those 5000 VA borrowers to take advantage of lower rates, yet they don’t.  We’re certain it’s not a matter of these homeowners qualifying to get approved for a better loan.  They just are not taking action.  These home owners with VA loans could truly benefit from a new loan with a much lower rate, without raising their loan balance or incurring any closing costs. The opportunity is actually far MORE compelling than just a lower rate achieved without incurring any costs at all.   And yet, over the years, this is what we hear from clients when they initially call:

This list of roadblocks goes on and on. But the most financially debilitating or damaging “opinion” or feeling from many homeowners is this:

“It was so much effort and cost to get that loan! And it seems that I just did it….. I feel like I’m losing out and not taking full advantage of the loan I got if I replace it with a new loan.”

There is a strong emotional attachment to the effort and/or expense which produced a loan that is NOW OBSOLETE. I totally understand this feeling. However, the inability to release yourself from that gripping emotional attachment and the resulting paralysis and lack of action can have serious financial consequences. Not refinancing when the opportunity presents itself is simply financially foolish. This INACTION is perhaps the most financially damaging and irresponsible choice that a Veteran can make. Unfortunately, it is too common.

Here’s how the transaction can be constructed to get a new loan for “free” that actually PAYS YOU to take advantage of an offer. No loan is ever “free.” However, accepting a “higher rate” than lower rate alternatives typically allows the lender to absorb all the closing costs without raising your new loan balance. An escrow impound account can be refunded to you from your old lender while the closing costs can include a new impound account and two months of interest. You effectively bypass two months of payments and get an impound account refund. Here’s how it all works “underneath the surface”:

If you’re not taking any cash out (you are only reducing your fixed rate or replacing an adjustable VA loan with a fixed rate), your transaction is called a VA streamline refinance. In lender’s terms, it is called an Interest Rate Reduction Refinance Loan or IRRRL. It is typically the easiest loan to qualify for among all loan applications. Very little is required from a client to produce the result.

Lenders can literally construct a no-points, no-fees 30 year fixed rate loan program, without your loan balance going up above your current principal balance. When funded, your new loan balance will be the same as your old loan balance. As an example, imagine you’ve got a $300,000 loan at 5.00%, and rates have dropped allowing new choices of rates between 3.75% – 4.50%. When you choose the rate of 4.50% (obviously the rate at high end of the range), special things can happen for you. Here’s how the math makes a “free” loan work for all parties. First, you’ll pay 0.50% less in interest for the life of the loan, and it didn’t cost you anything. Your initial reaction may be skeptical because you ask, “What’s in it for the new lender? How do they get paid?” Good question. Here’s how.

At the highest end of the available interest rate range (4.50% vs. 3.75% in this example), a large sum of money is available to pay for closing costs and provide enough for the lender to earn a reasonable profit. These funds are universally available to distribute to all parties in the transaction, including the lender and the lender’s loan officer. 

More importantly, funds are available to the borrower to pay for all the typical closing costs, including funding the new impound account for taxes and insurance as well as interest to bridge the gap between the old loan and the new loan. These funds are not available when choosing the lowest rate options. Here’s WHERE the funds come from.

If you’re an investor, you’ll be happy to advance a measured sum of money, literally pay some money UP FRONT, for the opportunity to receive a higher yield / higher rate of return on your investment and larger distributions or larger regular payments to you for the life of the investment. As an investor, you PAY a little up front and get a bigger return in the long run. This investor is known as GNMA – the Government National Mortgage Association. The loan is sold by the lender and purchased by GNMA. GNMA facilitates the “secondary loan market” by placing your loan into a GNMA investment security with thousands of other loans. GNMA then sells these securities or investments to “institutional investors” such as large insurance companies. Through this process, there’s plenty of money that is “advanced” through the “loan food chain,” into your loan closing to pay for closing costs, when you choose the higher rate!

If you select a lower rate, the yield or rate of return to the investor drops.  These funds available for your closing costs disappear as you slide down the scale of rate choices for your new loan.  In the “lower rate” scenario, the lack of these available funds translate into an increased loan balance as closing costs are financed, or simply added to the new loan balance.  

Again, when you’ve selected the higher rate, and as the transaction funds, money flows forward from the lender into your escrow account (at the title company).  Because these funds pay for your closing costs, the loan balance does not need to be increased as it would with a “higher-rate” choice where these funds are not available.

The actual lender gets repaid on the advance of the funds when the loan is immediately sold into a GNMA security – the investment.  The sum of money achieved by the loan sale to GNMA (to pay for all this at the highest rate) is substantial.  The loan sale can achieve as much as five points or more.  That’s 5% more than the principal loan balance.  On a $100,000 loan, the lender can receive $5,000 or more.  That’s how “mortgage banking” functions.  It can be a substantial sum of money that can then be allocated from all of your closing costs and still result in some left over so the mortgage company can remain profitable.  Recall that there are no VA non-profit lenders.  VA lending is a for profit universe in which the participants take substantial risks within their businesses.   The VA does not make loans.  It only provides the 25% VA Guaranty to partially cover the lender’s risk of foreclosure.  And VA loans default at a substantially more frequent pace than conventional loans.

Even if the change in interest rate only results in a relatively small reduction in payment, the cost is only measured in your time spent, and the return on your invested time is ENORMOUS.  Consider spending about two hours to receive these benefits measured in thousands of dollars:

Take advantage of all the benefits discussed in this chapter and let So Cal VA Homes help.  Call us at (949) 268-7742.