Veterans Beware of the VA Hybrid Loan
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Every year each loan originator has to complete continuing education in order to be able to renew each license they have. So every year I have to set aside 8 hours of my time (not an easy task at all) to enjoy an online continuing education course via online videos and or slide shows. To be compliant each loan originator has to complete their 8 hours in the following areas:
a. Three hours of Federal law and regulations;
b. Two hours of ethics that shall include instruction on fraud, consumer protection, and fair lending issues;
c. Two hours of training related to lending standards for the nontraditional mortgage product market; and
d. One hour of undefined instruction on mortgage origination.
Yes, it sounds exciting I know. Not to deter anyone from becoming a mortgage loan originator, but the job isn’t all glitz and glamor and you will have to endure the mundane and boring aspect of the job. Maybe I will start a new blog titled Wiser Snoozes and discuss the everyday grind of a mortgage loan originator.
Regardless, this year was no different, until I got to the nontraditional mortgage products section. This year the “instructor” in my online video sat in front of a green screen with nice graphics that were titled: ARM Mortgages. Having been in this industry for over a decade, I quickly rolled my eyes at my computer screen, since I claim to know it all when it comes to Adjustable Rate Mortgages (ARMs). He started discussing the market, margins, indices and what makes the Adjustable Rate Mortgage work. Right before I opted to take a break from the course, I perked up because the next video played: an interview with the President of an industry leader that focuses on ARM loans. “Interesting”, I thought. I was very curious to see what the leader of a large company had to say about selling and recommending an ARM to his clients.
I nearly fell out of my chair when I saw who this “expert” was. I don’t want to name names here, but I will say that he is the President of our largest competitor when it comes to VA Loans. Unlike most VA Lenders they focus on refinance and they focus on selling the VA Hybrid ARM Loan. Many Veterans get hundreds of direct mailers and phone calls from this company every year, trying to convince them to use the VA IRRRL program to refinance to a VA Hybrid Loan.
I have spent years selling against them by educating veterans and active duty service men and women on how the VA Hybrid actually works. Of course I am one man working for a smaller company and they are a very large national company, so the deck is stacked against us, but I refuse to give up the fight. I spent the next 10 minutes fuming on every word he said when asked about the ARM loan and how beneficial it can be.
He only spoke of the positive and neglected to even mention the negative aspects of the loan. I was so agitated I opened up my email and began writing a nasty letter to the provider of the education course I was taking. My wife had to calm me down and make me realize I was wasting my time writing my email. So instead I chose to dedicate an Owl Blog to this important issue.
In my opinion the VA Loan is the one of the best loans on the market. It gives people who have served our country a great home loan benefit. The rates are lower and the costs are cheaper, but the biggest benefit is that it is easier to qualify for since the loan is backed by the US Government and the Dept. of Veteran Affairs. One aspect of the program is the VA IRRRL. It stands for the Interest Rate Reduction Refinance Loan. It allows current VA homeowners to refinance to a lower rate or go from an ARM to a fixed rate with very little documentation. There is no appraisal needed and usually no income is required to qualify. It is VA’s streamline loan they offer to help current VA homeowner’s capture the best rates in the market. The VA Hybrid Loan is a mortgage with an initial fixed rate period of usually 3, 5 or 7 years. After the fixed period has expired the interest rate begins to adjust based on the market and chosen index (1 yr US Treasury index to be specific).
This particular company attempted to stay ahead of its competitors by focusing on the VA Hybrid Loan and started selling VA IRRRLs and providing the lowest rate possible by selling these Hybrid Loans to veterans. They advertised rates that were in the 2.75% range that would save the veteran hundreds on their monthly payment. They pitched the payment savings from such a low interest rate and often told veterans their payment would see little to no increase because the VA protects the veterans by enforcing rate caps that the rate cannot go above 1% in the first adjustment, can only adjust once every year and can only rise 5% total over the life of the loan. They informed their clients that if there was a rate change in the future that their payment was insulated because the new payment would be based on the principle balance that they owe and not the original loan amount they started with. “Who cares if your rate goes to 5% or 7%, your balance is forever decreasing and that will stop your payment from rising”. Ridiculous sale tactics to convince the veteran they had won the lottery and would own their home faster and spend much less than a stupid fixed rate VA Loan.
Here’s what they don’t mention when selling this “Perfect Loan” to veterans:
- They charge 2 discount points to get the rate, plus all other closing costs. A discount point is prepaid interest that “buys” down the interest rate. 1 discount point is equal to 1% of the loan amount being offered. For example a $200,000 loan amount would cost you $4,000 in extra cost, ouch! On average in my experience veterans were spending $8,000-$12,000 in total closing costs to get a VA Hybrid from this company.
- The time it takes to make up the difference in the closing costs with the lower payment, the fixed rate period ends and the loan begins to adjust. This means you really didn’t get anywhere by the time you are subject to an increase in your interest rate. Now if had taken this loan out ar0und 2008 when rates dropped and the market crashed you would of seen your rate go down, but over the last two years we have been in a rising rate environment and these Hybrid loans are seeing higher rates. At the end of the day you will spend more money to get the loan than you will save and then see a higher rate when the interest rate adjusts. It makes no sense.
- Your new payment is based on the principle balance that you owe when the loan adjusts, that part is true. However, one small detail they always leave out is that all ARMs work this way and in order to continue to end at the same term (30 years) the new payment would be based on the principle balance at that time and the remaining term you have left on the mortgage. So if you have 25 years left when your interest rate adjust higher, the loan reamortizes itself using the new rate, current balance and remaining term of 25 years. If the rate goes up, then your payment will go up based on a higher rate and a shorter term. “Ouch” is what your check book is going to say when that happens.
Bottom line, they pitch you this magical low rate that is going to save you money per month, but when you add in the costs and the risk of future adjustments of the rate: The VA Hybrid is not worth it! Get the lowest VA FIXED rate possible and ignore the phone calls and direct mailers from this company offering Low VA Rates. Better yet, Contact Us and we’ll be more than happy to help you with your VA Loan.
At Wiser Lending, we take very seriously serving those who have served our country. Wiser Lending specializes in all types of VA loans and we have helped veterans and active duty service men and women get the best VA loan possible. We are ranked among the top VA lenders for loan volume in the country.
Since we are a wholesale company, we can offer the best VA rates at the lowest costs and we only work with investors that underwrite directly to the VA guidelines. That means our VA loans are qualified based solely on what the VA has established for veterans and active duty service men and women to qualify for a home loan.
Thank you for your service!
Eric Weishaar
President | NMLS# 207659
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