Vets, be aware of negative effects of re-fi ‘deals’
By MICHAEL HUFF | Special to Stars and Stripes | Published: December 21, 2018
As veterans we proudly served this nation. Following our service, like many others in this nation, veterans largely spend our lives pursuing the American dream. In that pursuit, we are aided by one of the many benefits we earned from our service, the U.S. Department of Veterans Affairs Home Loan Guaranty.
The VA home-loan program helps veterans purchase homes with zero money down, often at interest rates lower than the conventional mortgage market. Those low rates are made possible by the secondary mortgage market, in which lenders package and sell home loans — including the loans obtained through the VA home loan program — to investors. Because the lenders can sell the loan at a premium, they are able to profitably offer lower rates to veterans. But this prevailing model has come under attack.
Here’s what’s going on: In recent years, veterans, as a group, have refinanced their homes at a much higher rate than the average American homeowner. Many of these refinances have happened for legitimate reasons, because veterans wanted to cash out equity to consolidate debt, make home improvements, or tend to other family needs. But some veterans — likely without fully understanding the risks involved — have used their homes as an ATM of sorts, cashing out equity every time home values increase.
This practice, promoted by aggressive lenders, is bad for many of the veterans cashing out their equity, bad for other veterans, and it’s bad for VA home-loan program as a whole.
Cashing out equity repeatedly is bad for veterans for a number of reasons:
They may end up with lower credit scores. Each time they incur debt, the credit bureau assesses their ability to repay based on their current income and financial obligations. A higher debt-to-income ratio usually corresponds with a lower credit score and higher borrowing costs.
It removes the valuable cushion provided by equity appreciation. As we learned the hard way in 2008, home prices can fall nationwide, with the decline especially acute in some areas. If a veteran cashes out all, or most, of his or her equity, any buffer for market fluctuations disappears.
They may hinder the ability to sell their homes. At closing, real estate transaction costs will total approximately 10 percent of the home’s value. If the loan balance is above 90 percent of the value or other repairs are needed to close the transaction, sellers may be forced pay for the excess costs, or just not be able to close.
They could add tens of thousands of dollars in payments over the life of their loans. If veterans refinance at a higher interest rate than they had before, the additional monthly interest costs incurred will be on the whole balance of the loan, not just the cash-out amount. The additional cost that may be hidden or incorporated in the loan amount will be paid back one day, either through higher monthly payments for the life of the loan or when the home is sold.
As a veteran, I know we’re all being bombarded with solicitations to refinance, often with low teaser rates — and hidden fees. For some veterans in need of cash, it may be better to take out a personal loan or use a credit card, rather than risk the potential negative effects of cashing out equity.
Just as important, because the VA home-loan program relies on investors willing to buy mortgage-backed securities, anything that disrupts the market — including a high rate of rapid refinancing — puts the whole program at risk. Global investors are becoming increasingly unwilling to invest in government-guaranteed mortgage-backed securities because of the rapid rate of VA refinancings. Should investor sentiment worsen further, it could spell the end of competitive interest rates for VA loans.
We can’t let that happen. As veterans, we owe it to each other and to future veterans to keep the VA home-loan program healthy and viable. So, before you respond to one of those aggressive solicitations in the mail or online, promising terms that are too good to be true, take a step back and consider that refinancing and taking equity out of your home may not be the best option for you — and other veterans too.
Michael Huff is head of government and stakeholder relations at the Government National Mortgage Association, or Ginnie Mae, the principal financing arm for government mortgage loans, including those guaranteed by the U.S. Department of Veterans Affairs. He is also a veteran of the U.S. Air Force.