Refinancing Options for Veterans

The following is a guest post by Tali Wee of Zillow.com Zillow is a great site to track the housing market in your area. Refinancing can be a great way to save money on interest, lower your payments, or get cash out of your home equity. Veterans have more options than most homeowners due to the Veterans Administration home loans program.

Many homeowners in recent years are refinancing due to the real estate market’s record-low mortgage interest rates. Although rates are expected to rise, lenders currently offer loans for qualified buyers at approximately 4.2 percent interest, varying daily. Refinancing allows homeowners to reduce their monthly mortgage payments to save money both immediately and long term.

When homeowners are underwater on their mortgages, meaning they owe more on their loans than the depreciated value of their homes, then refinancing is an absolute benefit. Additionally, refinancing assists homeowners who borrowed loans at steep interest rates. Homeowners should calculate whether refinancing is cost-effective by comparing the refinancing fees against the remaining costs of their mortgages.

The types of loans homeowners originally borrow to purchase their homes dictate the refinancing options available to them. Along with popular conventional and Federal Housing Administration (FHA) loans, veterans can purchase homes with Veterans Administration loans (VA).

VA loans are backed by the U.S. Department of Veterans Affairs and funded by private lenders. Veterans, military service members and their surviving spouses can apply for eligibility. VA loans are advantageous for buyers with low credit or no down payments, offering savings on the upfront costs of buying homes. However, some veterans elect alternative loan programs.

Here are three types of loans and their corresponding refinancing options.

Conventional Home Loans – HARP

Service member holding homeConventional loans are backed by government-sponsored enterprises Fannie Mae and Freddie Mac, and are the most commonly refinanced loans. Veterans with 20 percent down payments are more likely to select conventional loans to avoid private mortgage insurance (PMI), an extra monthly cost that protects lenders if borrowers default on their loans. The Home Affordable Refinance Program (HARP) was designed in 2009 to help underwater conventional loan holders refinance at lower interest rates. To apply for HARP, homeowners must be current on their mortgage payments without any late payments in the past six months and no more than one 30-day late payment in the last 7-12 months. Applicable conventional loans must be conforming; in most continental U.S. states conforming loans are $417,000 or less.

Conventional loan refinancing requires homeowners to pay for an appraisal to determine the current market value of their homes. Once home values are determined, refinance lenders require borrowers to have 20 percent equity in their properties, also known as 80 percent loan-to-value (LTV). Borrowers with less than 20 percent equity, who assume PMI, are allowed refinancing with 5 percent equity also called 95 percent LTV. Lenders also verify borrowers’ employment, requiring employment history for the past two years and credit scores of at least 620.

FHA Home Loans – FHA Streamline Refinancing

Veterans might have FHA loans if they purchased their homes as civilians, but most homebuyers without 20 percent down opt for VA loan programs. FHA loan holders are not eligible for HARP, but can pursue FHA streamline refinancing. This refinancing option allows homeowners to reduce their monthly mortgage payments by 5 percent at a minimum. Homeowners who completed an FHA refinance in the past are eligible for a second as long as their payments decrease by 5 percent. Additionally, adjustable-rate mortgages (ARM) typically begin with low interest rates for a specific period of time and then transition into steeper rates throughout the later years of loans. FHA streamline refinancing allows ARMs to refinance into fixed-rate mortgages where rates are solidified throughout the life of loans.

FHA streamline refinancing offers an appraisal method or a no-appraisal option. The FHA appraisal determines the maximum loan amount. Although FHA appraisals are not mandatory for no-appraisal refinancing, lenders typically require conventional appraisals to protect their investments. FHA streamline refinancing does not require income verification or a specified credit score, though individual lenders usually have credit score guidelines. Lenders review loan payment history and offer the lowest interest rates to borrowers with the least risk.

VA Home Loans – VA Streamline Refinancing

Many veterans take advantage of VA loans when they initially purchase their homes to sidestep the down payment, PMI and penalties for loan prepayment while limiting closing costs. Veterans with VA loans hoping to reduce their monthly payments are eligible for VA streamline refinancing, also known as Interest Rate Reduction Refinance loans. This refinancing option provides VA loan borrowers low interest rates, reduced funding fees and lenders credits to apply toward closing costs.

VA refinancing, like FHA refinancing, does not require an appraisal, income verification or specified credit score. However, lenders can apply credit score boundaries and conventional appraisal requirements as terms of their loans. These borrowers must be current on their mortgages with no more than one 30-day late payment within the past year. Additionally, they must assume these properties as their primary residences.

VA Cash-Out Refinance

Veterans interested in refinancing to convert their home equity into cash can apply for VA cash-out refinancing. This refinancing option is available to veterans holding either conventional or VA loans. Civilian cash-out programs exist, but most veterans opt for VA cash-out plans because they offer the lowest interest rates, longest payback periods and 100 percent of property value in cash – or 100 percent LTV. Applying for a VA cash-out refinancing loan includes the same benefits and disadvantages of a traditional VA home loan.

Veterans unable to make their loan payments should contact their loan servicers to discuss payment assistance programs designated by the U.S. Department of Veterans Affairs. Alternatively, veterans are provided with some of the most cost-effective loan programs on the market and those considering refinancing should shop for lenders offering the lowest rates.

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The Average Net Worth of the Above Average Military Officer

Not a commissioned officer? I’ve got a chart for the Above Average Enlisted Personnel as well. Check it out next week! Thanks to Sam at Financial Samurai for the idea to put this chart together.

It takes an above average person to become a military officer. Above average just means better than 50% of the population. I would say usually military officers represent the top 25% of society, which is pretty scary when you consider some of the officers I’ve encountered in my years in the Air Force.

There are four main routes to becoming an officer, all of which attract above average people:

  • The Academies: West Point, Annapolis, and Colorado Springs
  • Reserve Officer Training Corps or ROTC: Army, Navy, and Air Force
  • Officer Candidate School or Officer Training School: all branches
  • Direct commission, usually only for the medical and chaplain corps

The process of applying to the service Academies takes years, top grades, a difficult nomination from a Congressman or Senator, a decent SAT score, and the ability to pass a physical fitness test. It’s estimated only 1 in 2000 who begin the application process attend.

Once you’re accepted at an Academy, you will have to get through your initial training in your “plebe” year and many more strenuous assessments throughout your four years. The constant pressure of military training and academic study through your four years of college makes the Academy route one for above average people.

If you go the ROTC route, you’ll have difficult summer training programs to attend and additional class work and leadership training beyond what your civilian peers are taking. And if you do the Officer Training School route, you’ll need at least a bachelors’ degree in addition to surviving a several month indoctrination and leadership course. While both of these courses may seem easier than the Academy route, above average officers can come from any recruiting source.

The Average Net Worth of the Above Average Officer

above-average-military-officerAn officer is definitely more than what is in his/her bank account. You could be the best leader in the world and drowning in credit card debt, driving two cars you can’t afford, and not investing anything into the TSP.

Usually the above average officers want to excel in all aspects of their life. In this article I’m only going to examine how much an above average officer will have saved throughout their career.

The above average officer:

  • Knows to not completely rely on the military retirement system
  • Tracks all their investments in one place with Personal Capital
  • Banks with a military friendly bank or credit union like USAA
  • Understands what a good deal the Roth TSP is and invests regularly
  • Knows that spending more than you earn makes no sense
  • Never carries a balance on their credit card, but they do use a cashback credit card to get money back for their purchases
  • Doesn’t take out the USAA Career Starter loan unless they are investing it or paying off a higher interest rate loan

A few assumptions:

  • These numbers are for a single officer. Spousal income should only increase your total net worth or standard of living.
  • No student debt, because most military officers’ come from ROTC (scholarships) or the Academies (free)
  • No USAA cadet loan, because you are smarter than the average cadet
  • Because you move quite often, we’ll assume that you buy your first house late in your career (when you make O-4)
  • 4% investment returns, which are a bit below average for the stock market
  • The numbers are listed for years after entering service. So as a first year O-1, you won’t have received your first paycheck yet. As a 27 year old O-3, you’ll have just promoted from O-2 at your 4 year time in service mark.
AgeRankRoth IRARoth TSPTaxable InvestmentsHome EquityTotal Net Worth
23O-1$0$0$0$0$0
24O-1$5,500$4,500$0$0$10,000
25O-2$11,220$22,180$0$0$33,400
26O-2$17,169$40,567$0$0$57,736
27O-3$23,356$59,690$0$0$83,045
29O-3$36,481$100,261$24,480$0$161,222
31O-3$50,678$144,142$57,078$0$251,898
33O-4$66,034$191,604$92,335$0$349,973
35O-4$82,642$242,939$130,470$12,000$468,050
37O-4$100,606$298,462$171,716$24,000$594,784
39O-4$120,035$358,517$216,328$36,000$730,880
41O-5$141,050$423,472$264,580$48,000$877,102
43O-5$163,779$493,727$316,770$60,000$1,034,277

 

In summary:

  • A smart second lieutenant (O-1) with a year under his/her belt should have saved $10,000
  • A financially savvy first lieutenant (O-2) should have $57,000 tucked away, by maxing out his/her Roth IRA and Roth TSP.
  • Once you’ve been a captain (O-3) for two years, you can start making substantial taxable investments, while still maxing out your Roth IRA/TSP. You should be able to invest an additional $1000-1200 per month. As a 4 year captain you should cross the quarter million mark in net worth.
  • Congratulations on making major (O-4)! After four years as a field grade officer, you should have over half a million invested.
  • As you near retirement as a lieutenant colonel (O-5), you should be hitting that million dollar mark. Congratulations on a long, successful career and saving over a $1,000,000. You’ll be able to safely withdraw $30,000-$40,000 per year from your investment accounts in addition to your military pension. Financial independence is yours!

So how are you doing? Do you consider yourself above average when it comes to money in the military? Where do you fall on this chart? Doing better than these numbers or are you behind?

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