The Housing Bubble Debate
Is the 2017 housing market in another bubble? That’s debatable. But there’s no question, in many places, home prices are soaring above their 2006 highs. Buyers with VA home loan benefits may be able to relieve some pressure on their pocketbooks with the cash-saving features of a VA loan.
A housing bubble is a run-up in market prices usually driven by supply and demand. We are in the midst of a sellers’ market where supply is low and demand is way up there. As a result, home prices in many places are definitely on the rise. According to the National Association of Realtors (NAR) data, the median home price rose above $250,000 for the first time in history in March 2017. At $260,000, the median home price was up 8% from the same time the prior year.
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Are Home Prices Up Everywhere?
No doubt, prices in general are increasing at a rapid pace―in some regions more than others. The Federal Housing Finance Administration (FHFA) home price index (HPI) from February 2016 to February 2017 shows national home prices up 6.4%. FHFA uses nine census divisions for its HPI. All nine areas saw increases. The low was 4.6% in the Middle Atlantic division, and the high was 9.5% in the Mountain division.
Young Buyers Challenged with Fewer Starter Homes for Sale
Prolonged price hikes and persistently low inventory can make it especially hard for first-time buyers to get into a starter home. Many more millennials are in the market for a first house today. But properties that would be considered starter homes are few and far between. According to Trulia, homes available for the average first-time homebuyer saw their sharpest year-over-year decrease in three years—down 12.1%.
It may take a year or more for new construction to catch up with demand. In the meantime, VA-eligible borrowers have leveraging power with their home loan benefits. Due to low starter-home supply, millennials are considering larger, more expensive homes. Two unique features of VA loans can help eligible borrowers get into a higher-priced home with less money out of pocket.
No PMI Saves Veterans Cash Each Month
PMI stands for private mortgage insurance. It’s a premium many conventional borrowers pay monthly on top of their mortgage payments. PMI is typically charged when a borrower has less than 20% cash to put toward a down payment. The premium protects the bank should the borrower default on the loan. PMI can easily add $200 to the monthly payment on an average-priced home.
VA borrowers never pay PMI. It’s one of the fees forbidden by the VA home loan guaranty program. Instead, the VA requires a funding fee that can be either paid up front or financed into the loan. The fee varies depending on the type of loan, military service and past benefit usage. Surviving spouses and qualifying disabled Veterans are exempt. Even with a VA funding fee rolled into the loan, military borrowers save money each month when they don’t pay PMI.
For the sake of comparison, calculate two loans for the same home priced at $260,000. One shows the monthly payment financed with a conventional loan with a 10% down payment and PMI. The other shows the monthly payment of a VA loan with no down payment and a funding fee of 2.14% added to the loan. For this example, the interest rate and APR are the same for both.
Even with the funding fee added to the loan, the monthly payment is $168 less with a VA loan.
Click here to see if you can save monthly with a no-PMI VA loan
No Down Payment Can Save Money in the Short and Long Term
For some, zero down payment financing can be the difference between owning a home or not. This may be especially true in a seller’s market. The US Department of Veterans Affairs is willing to provide maximum guaranties for VA home loans up to $424,100 (and higher in high-cost areas). The government will secure about 25% of the home’s value for the lender. The secured loan allows the lender to offer terms like zero down payments and competitive rates.
Consider that the average down payment of a conventional mortgage is 20%. Based on the median home price of $260,000, it can be a difference of $52,000 cash out of pocket required on a conventional loan.
Low Rates for VA Mortgages Thanks to Government Backing
The money Veterans can save as a result of 100% financing doesn’t stop with down payments. The government backing may also be the reason why some lenders offer low rates on VA loans. Average 30-year rates for VA mortgages are consistently lower than conventional rates. In March 2017, Ellie Mae’s Origination Insight Report showed an average 30-year note rate for conventional loans at 4.5%. The average VA rate was 4.1%. Over time, a .4% interest rate difference on a $260,000 loan can save a Veteran a small fortune. Consider these two hypothetical mortgage calculations*:
*The purpose of these calculations is a simplified apples-to-apples comparison of loan interest rates. Calculations for actual loans would differ due to the inclusion of other fees and factors.
Whether or not the current housing market is experiencing bubble-like qualities, or is just undergoing a period of strength, the home loan benefits available to you as a Veteran have cash-saving features you can leverage to get into a home in today’s market.
For more information, click here to contact a VA-approved lender.
Veterans First is a trade name of Wintrust Mortgage, a division of Barrington Bank & Trust Company, N.A., a Wintrust Community Bank. I NMLS# 449042 I Equal Housing Lender