|
Ask Dr. Don
By Don Taylor, Ph.D., CFA • Bankrate.com
VA loan rates
Dear Dr. Don,
I have been trying to keep up with mortgage rates for a VA loan.
They seem to be different rates from a conventional 30-year, fixed-rate
mortgage. Where can I find the rates for VA loans? What are the
rates based on?
Vicki Veteran
Dear Vicki,
The Department of Veterans Affairs qualifies veterans to participate
in the VA loan program. You're having trouble finding a rate history
because it isn't a rate; it's a loan program. Participating lenders
originate VA loans based on the homeowner's eligibility.
The VA guarantee on the loan protects the lender
against loss if the payments aren't made, and is intended to encourage
lenders to offer veterans loans with more favorable terms. The homeowner
also benefits because she doesn't have to pay private mortgage insurance
and may borrow up to 100 percent of the home's cost.
A VA loan requires most veterans to pay a basic
funding fee of 2 percent. Eligible Reserve/National Guard individuals
pay a 2.75 percent basic funding fee. Putting 5 percent or 10 percent
down will reduce the fee. The fee can be rolled into the mortgage
but will raise the annual percentage yield, or APY, on the mortgage.
The lender may charge other reasonable closing costs, which can't
be included in the loan. No commissions, brokerage fees or "buyer
broker" fees may be charged to the buyer. The Veterans
Administration's Web site can provide you with additional information.
To follow rates, find out the APY for a VA loan
from a lender in your town. Compute the spread between the APY of
the VA loan with the APY of a conventional loan. That spread should
remain fairly constant over time. Then you can use this site to
follow the vagaries of the mortgage market and feel comfortable
about knowing the approximate interest rate for VA financing from
your local lender.
PMI
Dear Dr. Don,
Regarding private mortgage insurance -- how are the rates determined?
We have excellent credit and are not first-time home buyers. We
want to upgrade to a bigger home and can only put 10 percent down.
We are considering doing a second mortgage to avoid the PMI but
are wondering if the costs to secure the second mortgage are worth
it. The cost of the new home is $140,000. We also have VA eligibility.
What would be our best course of action?
Second Susan
Dear Susan,
Your first question is the easiest, so let's start there: The
insurance provider determines PMI rates. Your lender chooses the
provider and should be able to give you a rough idea of the monthly
PMI cost on your $126,000 mortgage.
PMI protects the lender. Lenders want you to
have sufficient equity in your home so you won't consider walking
away from the property. Your equity also reduces the probability
that the lender will lose money if it has to sell your home in foreclosure.
That's why second mortgages are more expensive than first mortgages
-- the second lender is taking on those risks.
Still, taking out a second mortgage has become
a very popular way of getting around PMI requirements. Most first
mortgages require a loan-to-value factor of 80 percent before you
can cancel your PMI. But a second mortgage can get you to that point
on closing day on your first mortgage. Then your mortgage payments
are working toward paying principal and interest instead of paying
PMI. The interest expense on the second mortgage is usually tax-deductible
and that lessens the difference between the two mortgage rates.
Some mortgage originators are even offering a product called 80-10-10.
That is an 80 percent loan, with 10 percent down, and a second mortgage
for 10 percent of the home's value.
Having said all this, it will probably be in
your best interest to pursue the VA loan. You won't have any PMI,
the 10 percent down actually qualifies you for a reduced basic funding
fee, and your entire loan will be at one mortgage rate vs. a blended
rate.
You've got your house picked out. That's the
hard part. Make your lender earn his fees by exploring the three
different loan options. I'll be surprised if the VA loan isn't the
best solution, but it should be easy for a lender to show you that
it's true.
Bankrate.com writers base
their answers on our editorial content and advice of financial professionals.
We make no claims or representations about the accuracy, timeliness or completeness
of such content, advice or the answers provided to you. Our content, advice
and answers are intended only to assist you with your financial decisions. However,
by its nature such information is broad in scope. Your financial situation is
unique, and our content, advice and answers may not be appropriate for your
situation. Accordingly, we recommend that you get different opinions and seek
the advice of your accountant and other financial advisers before making any
final decisions or implementing any financial or investment strategy.
-- Posted: Jan. 10, 2000
|
