If My Iraq War Veteran Home Buyers Just Got a 3.875% Interest Rate, Why Can’t You?

My Iraq War Veteran first-time home buyers (that’s them in the photo) and I thought we were hearing things when the lender said, “You qualify for a VA loan at an interest rate of 3.875 percent.” But we heard correctly! Qualified Veterans can get an interest rate as low as 3.875 percent on a VA (Veterans Affairs) loan.

Here’s the deal my Iraq War Veteran first-time home buyer clients got just last week:

• 3.875 percent interest rate for first 5 years
• No points
• The rate adjusts according to the Treasury ARM Rate (which is better than the LIBOR ARM Rate)
• The interest rate can’t increase more than 1 percent per year (only after the first 5 years)
• The maximum interest rate they can ever have is 8.875 percent regardless of how high future rates are
• No prepayment penalty

They are not planning on staying in their home for more than 5 to 7 years so this loan is perfect for them. A 30 year fixed rate VA loan is currently in the 5.25 percent range so they are saving about 1.5 percent on the interest rate. That comes out to a savings of $209.02 per month based on the amount they financed.

By the time they move, their rate will be between 3.875 percent and 5.875 percent. I think it’s safe to say that either of those rates will be lower than what the 30-year fixed rates will be in 5 to 7 years.

Besides saving money, why else is the low rate and cap so important?

Because the loan is assumable. This means that rather than a buyer having to go out and get their own financing/loan to buy this home, if they qualify, they can assume the existing loan and it’s terms (aka interest rate).

Let’s say rates are at 10 percent in 7 years. A qualified buyer could purchase their home and assume the loan at no more than 5.875 percent with the cap being at 8.875 percent.

And also because they’re building equity in their home more quickly. The lower the interest rate, the more of the monthly payment goes towards principal rather than interest. This means they will have paid down more principal and they will have more equity in their home than had they gone with a 30-year fixed rate loan at 5.25 percent.

How fast do you think they will be able to sell their house in 7 years when rates are 10 percent with “Current 3.875 to 5.875 percent interest rate assumable loan”?!

Can you say, “FAST!” No matter what the housing market conditions are like in 7 years, this property will stand out above the rest for the assumable low-rate financing alone.

Let’s do the math and see why.

Let’s say the property is worth $350K and rates are at 10 percent 7 years from now…

• If the buyer finances $350K at 10 percent, their Principal and Interest comes out to $3,071,50
• If the buyer assumes the current loan at 5.875 percent (the most it can be in 7 years), their Principal and Interest comes out to $2,070.38

That’s a savings of $1,001.12 per month.

In addition to saving $1K per month, the buyer will be building equity in the home much faster at the lower interest rate than they would at a higher interest rate because more their monthly payment will be applied to Principal rather than Interest.

Now you see why buyers will be all over this property like white on rice!

It’s a “win now and win later” situation for my Veteran first-time home buyers, as well as all Veteran home buyers.

If you are a Veteran and thinking about buying a home, email or call me and I will put you in touch with the loan officer that my clients worked with.

Say “Goodbye” to sub-5 percent Mortgage Rates?

Mortgage rates are ridiculously low right now. Words such as “historically” and “unbelievably” are being put in front of “low rate of…” by lenders, the media and consumers alike. But that may changing. And quickly.

Mortgage rates have already gone up well over half of a point in the past few weeks and are over 5 percent. Heck, mortgage ratest recently went up half a percent in just one day! The increase in mortgage rates could be a sign of things to come.

Why? Because mortgage rates are artificially deflated. That’s right, I said it – artificially deflated.

The government has been pumping money into the markets to artificially keep rates down in order to stimulate the housing market and keep the entire US economy from collapsing. Aside from this infusion of borrowed money, there is very little, if anything, that justifies rates being this low.

Here are 3 major issues with what’s going on right now…

1. The government is running out of money to pump into the market. Once there’s no more to dump into the market, you’ll see rates increase almost immediately (funny how the government is starting to run low on cash and rates are already on the rise)
2. The more the US goes into debt by pumping borrowed money into the market and buying up mortgage backed securities (MBS), the more interest rates will go up in the future (for a variety of economic reasons). This problem will be even greater if the government now borrows even more money to keep mortgage rates down even longer (which they’ve already done a few times)
3. The government can only buy so many MBS and once they can’t buy any more, the MBS have to be sold on the traditional secondary market and investors. Investors are becoming less and less eager to buy MBS at such low rates and will stop buying them up until they come with a higher rate of return (aka higher mortgage rate)

Many (including the government) have previously said that rates would stay low for the remainder of 2009. But even some of those folks are starting to question that theory and are now saying that rates will start to rise well before the end of 2009 – as they’re already doing (see the following chart courtesy of BankRate.com).

Nobody has a crystal ball and can say what will happen with certainty. But many signs point to a low chance of rates going down from here or staying put and a much greater chance of them going up. We could very well be in the perfect storm and see 6 or even 7+ percent mortgage rates by the end of the year.

Related Articles

Rates Rocket Up Quickly – BankRate

Mortgage Rates Rising – CNN Money

Mortgage-Backed Securities, the Fed, Ben Bernanke and more – Mortgage News Daily

Capital Market Turmoil Finally Hits Virginia Homebuyer Loan Programs

The Virginia Housing Development Authority has finally been affected by the prolonged turmoil in the capital markets.  Due to liquidity issues in the marketplace the VHDA has been unable to secure financing and will therefore have to cutback or eliminate altogether several of their Single Family Homeownership Loan Programs.  Here is the complete list of changes and the effective dates sent out in the newsletter by VAR.

Read more

Mortgage Interest Rates and Financing Options – To Pay Or Not To Pay A Discount Point?

Many buyers ask me if they should pay a point (aka "buy down the rate") or not when securing a loan. They ask if and how it actually effects their mortgage interest rate and monthly payment and whether it’s even worth doing in the grand scheme of things.

Though I offer my buyers an explanation verbally, I will begin recommending that they read an excellent post entitled "What’s The Point?" by mortgage expert Rhonda Porter, active contributor on Rain City Guide.

Rhonda does an excellent job explaining how mortgage interest rates can be priced with or without a discount point along with a case study showing if/when it’s worth paying a discount point(s).

If you are curious about this topic, definitely take a look at the post and the comments and check out the links for additional resources.