Is it too soon to refinance your VA loan?
Get a refinance offer? Things to consider before you sign
- Have you had your original loan for at least six months?
- How much would you really save, considering monthly payments and the length of the loan?
- Ask about closing costs and fees, and how that affects your payments and savings.
- If you are in a fixed-rate mortgage, an adjustable rate is riskier over time.
It has become more common: the ink is barely dry on your mortgage before you get a call to refinance now and save big money.
Veterans and service members who took out home mortgages backed by the U.S. Department of Veterans Affairs are targeted for these rapid-fire refinance offers, sometimes just days after they’ve finalized their original VA loan or even just after closing on another refinance deal, according an analysis done by Ginnie Mae, the agency that guarantees the loans.
The concept of these aggressive, high-pressure deals is referred to as loan churning. It is a predatory lending practice, where the lender tries to make a quick buck on loan origination fees. These companies don’t consider whether the refinance is a good deal for the borrower. The goal is to do as many refinances as they can to boost their profit, Michael Bright, the acting president and chief operations officer with Ginnie Mae, wrote in a letter to U.S. Sen. Elizabeth Warren.
But changes are likely coming soon. Veterans Affairs in January 2018 announced plans to roll out a rule change meant to crack down on loan churning. That same month, a bill to protect military members from predatory lending was introduced in Congress.
Changing the loan churn
Typically, mortgage holders refinance to gain better terms, such as a lower interest rate or a shorter loan term. In loan churning, lenders aggressively target VA mortgage holders without honest consideration for whether the borrower would benefit from the new loan. Borrowers are promised lower interest rates that will reduce their monthly payments and save lots of money over the term of the loan.
Borrowers can save thousands of dollars by refinancing at lower rates. In questionable churned loans, however, borrowers receive such a small interest rate reduction that it will take years for them to recoup the money that they paid out in fees to refinance. Many lenders suggest a rate cut of at least a percentage point before considering a refinance.
In other churning scenarios, those with existing VA loans are solicited within days of closing on their first loan. Others have refinanced their loans multiple times or have refinanced loans to move from fixed interest rates to adjustable rate mortgages. Oftentimes, none of these scenarios are favorable to the borrower. In addition, the fees associated with refinancing can add thousands of dollars to the loan amount, according to the VA.
The VA’s streamline refinance program is set up to be a quick and relatively easy way for a borrower to refinance an existing VA loan to take advantage of a lower interest rate. Essentially, the offending companies have exploited the program’s weaker underwriting standards.
Wheels of churn change
The VA has signaled it will move to stamp out the churning practices. In testimony before a House subcommittee in January 2018, Jeffrey London, executive director of the loan guaranty service with the U.S. Department of Veterans Affairs, said the agency will soon release the details of the changes.
London indicated that the VA planned several changes that would affect every VA borrower, and make it harder for lenders to churn loans. He specifically mentioned that borrowers should get more information on the benefits of the refinance at the beginning of the process.
The VA has yet to release other rule changes, but the agency is under pressure to impose a test that ensuring that the borrower gets a reasonable and guaranteed interest rate reduction, and can recoup the money paid in upfront fees within a few years. The largest mortgage trade group, the Mortgage Bankers Association, has urged the VA to implement such a test.
Congress, meanwhile, is considering legislation aimed at VA loan churning. In January 2018, U.S. Sens. Elizabeth Warren, D-Massachusetts, and Thom Tillis, R-North Carolina, introduced the Protecting Veterans from Predatory Lending Act of 2018.
The bill proposes that borrowers must pay on their original VA loan for at least six months before refinancing. Lenders also must certify that any fees associated with originating the refinance loan would be recouped from the interest savings within three years.
“We want to make sure that before a veteran or a veteran’s family applies for one of these loans, that the lender demonstrates a real benefit, not a benefit to them through the fees, but actually a real benefit to the veteran and the veteran's families,” Tillis said.
It should be noted that the government doesn’t believe that churning is a widespread practice among VA lenders. Most VA lenders aren’t churning loans, and often waive many of the fees in a streamline refinance. Many lenders and mortgage trade groups have been calling for changes that will stop the bad apples in the business from doing it.