Beware these 5 shady VA refinance tactics
VA refinance offers that should set off warning bells
- Suspiciously low interest rates
- Aggressively pushing ARMs
- Pay no money out of pocket
- Skip monthly payments
- Pressure to act now
You’ve barely closed on your mortgage loan when you open the mailbox and there it is. An official-looking letter that seems to be from the U.S. Department of Veterans Affairs (VA) or other federal government agency. There are lots of exclamation points, so it must be urgent!
“You are prequalified to take advantage of a historic VA refinance program!” it reads. “Save hundreds of dollars on your monthly payment — this offer ends soon!”
Sound fishy? It probably is.
In recent years, predatory lenders have targeted veterans and service members with VA mortgages to refinance their home loans — sometimes repeatedly — at little benefit to the borrower and a major profit for the lender. Refinancing your mortgage can be a wise financial decision, but be wary of offers that sound too good to be true.
The VA offers the Interest Rate Reduction Refinance Loan (IRRRL), also known as the VA streamline refinance, designed to help veterans and service members quickly and easily refinance into a lower interest rate. Recently, however, unscrupulous lenders have taken advantage of the relatively lax eligibility requirements to push VA IRRRLs, in particular, and gain profits by charging high fees. So pervasive is the problem that the VA and Consumer Financial Protection Bureau have issued warnings to VA mortgage-holders, while bond insurer Ginnie Mae has launched an investigation into lenders aggressively peddling VA refinances.
The following examples of VA refinance offers should make you do an about-face.
1. Suspiciously low interest rates
Get a lower interest rate and save lots of money over the term of your loan!
A lower rate can, in fact, save you lots of money over the loan term. There’s more to the math story, however. You’ll need to tally out the difference in the rates, taking into account the fees, closing costs, time and effort for the new loan. When you think of the savings, you need to account for the time to pay those fees.
You may be required to pay discount points to get the lower interest rate or refinance into a shorter, 15-year mortgage, which means a substantially higher monthly payment if you are used to paying down a 30-year loan.
In the case of questionable refinances, some borrowers have received such a small interest reduction that it will take years for them to recoup the money that they paid out in fees. Remember that the VA does not set mortgages rates, nor do they charge any costs beyond the VA funding fee, which is generally about 0.5 percent of the loan amount for an IRRRL. Avoid lenders who claim otherwise.
2. Aggressively pushing ARMs
Ditch a fixed rate and switch to an adjustable-rate mortgage for lower payments!
Yes, the adjustable rate may be lower, but for how long? There can be benefits to an adjustable-rate mortgage (ARM), but they are riskier in the long run.
With a fixed-rate mortgage, you know what your rate is going to be month to month, for the entire length of the loan. An ARM typically starts out with a low interest rate that increases after a period, within a few months or maybe a year, depending on the deal you sign. The interest charge can rise rapidly and your payments are adjusted higher accordingly. Conversely, rates can drop, and you’ll have a lower payment for a while.
An ARM could save you money — for example, if you sell your home before the rate adjusts — but borrowers face uncertainties after the initial rate period ends and could wind up paying much more money than they would have sticking with a fixed rate.
3. Pay no money out of pocket
Refinancing your VA loan won’t cost you a penny!
You don’t hand over money, but you do pay in the end. There is no such thing as a no-fee loan. In any financial product offering, lenders charge fees as a way to generate profits. When you refinance your VA loan, the question is a matter of when you will pay. If you’re not paying these fees when you take out the loan, you can bet they are tacked onto the bottom line.
The VA allows for its funding fee to be rolled into the loan amount, and many lenders allow you to finance closing costs and origination fees, as well. The practice is not harmful as long as you are aware of exactly how much you are actually financing after all additional fees are tallied. It can be several thousand dollars.
4. Skip monthly payments
Refinance now and skip a monthly payment (or two). You keep the cash!
Closing a refinance deal can be timed to feel like you skipped a payment. For example, if your refinance is funded just prior to when your monthly payment is due, your original loan is paid off in full and your first payment on the refinance is typically not due for 30 days, thereby allowing you to go one month without making a mortgage payment.
Of course, the lender is not being a generous benefactor. The payment you “skipped” is actually tucked into the loan amount and accrues interest over the course of the loan. It is more accurate to say the payment is deferred rather than skipped, and in the long run, you will likely pay more than if you simply made the initial month’s payment from the start.
Of note: the VA expressly prohibits lenders from advertising the misleading ability to skip a payment with an IRRRL, though some questionable lenders still use the marketing tactic.
5. Pressure to act now
Your mortgage has been selected for a special refinance program available for a limited time only!
Language guaranteeing a lower rate or pressuring you to act immediately are tell-tale signs of a scam. Reputable lenders will not promise an interest rate until they have assessed your credit score, debt-to-income ratio and full financial picture. Although rates may shift, there’s rarely a time limit on how long you have to evaluate the merits of a refinance.
Refinancing your VA mortgage may be a smart financial decision but should not be taken in haste. Compare reputable, VA-approved lenders and crunch the numbers on the refinance to make sure the new rate, loan term and fees are ultimately to your benefit.