Jan. 18, 2018
Attention VA Homeowners...Don't become a Victim to "Loan Churning"
Early this year, Congress was told how VA loan backers are becoming concerned about "loan churning". Loan Churning is where a lender solicits an existing borrower to refinance their current loan for a better rate with the same or different lender. This is becoming a predatory practice targeting homeowners who have a VA home loan. You often see these solicitations in the mail, many that look to be from a government entity, offering well below market interest rates to entice you to refinance your loan. First of all, most of the rates being advertised are for an Adjustable Rate Mortgage and secondly, you don't get transparency on how much refinancing your home truly costs you.
The average costs to refinance a VA fixed-rate refinance is $6,000. On average, a veteran will need 5.5 years to recoup loan costs, Mortgage News Daily reports. Furthermore, refinancing from a fixed rate product into an adjustable one can result in refinance fees up to $12,000 and could require 7 years to break even (assuming the interest rate doesn't adjust upward). Adjustable rate mortgages interest rate will most likely climb as the stock market climbs and economy grows, so it makes little sense to refinance your current VA loan that may be at 4% to 5% into one of these loans because you're likely to end up paying more than your fixed rate mortgage as interest climb. Many of these homeowners will be tempted to refinance again into a fixed rate when they notice their adjustable interest rate creep up and the cycle continues, eating up equity and money in re-finance costs.
There are two types of re-finance loans VA homeowners can obtain. The first is a cash-out refinance as described above and the second is the stream-line refinance that does not allow any cash-outs but allows the homeowner to reduce their interest rate without an appraisal, etc. There are fees associated with both programs. Most lenders describe these programs to you "at no cost", however there is always a costs when re-financing. Otherwise, would they work for free? The lenders tack on these cost to your loan balance. To figure out if you should refinance or not we recommend you do some simple math to determine how long you would have to pay on the loan to break even before you can claim you "saved" money. Here is the math:
First calculate how much your balance is going up due to the new added closing costs; i.e., old balance $195,000, new balance is $201, 000=$6,000 added to loan balance.
Second calculate the difference in loan payment between old and new; i.e., old payment $1,100 and new payment $1,000=$100 per month in savings on payment
Third divide your total closing costs by your monthly savings to arrive at number of months it will take to recoup your re-finance expense; i.e.; $6,000/$100=60 months (60 months/12(months per year)= 5 years.
As a veteran myself, I hate seeing fellow Veterans being specifically targeted for predatory or misleading scams so that others can pocket their hard earned equity and money. These loan solicitations are non-transparent and misleading and if you do want to refinance then use a local reputable lender. These mailers offer nothing, and I mean NOTHING that your local lender cannot do, so if you are a good candidate for refinance and determine it makes sense to do so, then use someone you can trust and not someone who use misleading tactics to get you to call. Not only do those units charge higher than normal interest rates, they will not be honest with you on if re-financing makes sense for you or not.
Feel free to reach out anytime for recommendations to VA lenders in the community. We are here to help you protect your investment and equity so never hesitate to inquire if you have questions or concerns.