[This article was originally published on the 2nd Marine Aircraft Wing website.]
This article is intended to give the reader a basic understanding of the sales techniques of the VA streamline refinance offer, and at the end of the article guidelines are provided to help decide who this type of loan is really good for.
Recently, there have been a lot of VA streamline mortgage refinance offers being circulated through the mail. In bold letters the flyers announce that this program is only for VA loans, a limited time, no home or pest inspections required, no appraisal required, skip one or two months mortgage payments, get an escrow refund at closing, and close in 7-10 days. The offers seemed too good to be true, but I wanted to see for myself. I shopped around looking at many reputable loan companies and banks to see what loan offers that suited my needs, and then called the number from one of these flyers. The information that I found was pretty shocking to me, but possibly helpful to others if their situation fit the costs of this type of loan.
I called the number on the flyer late on a Friday afternoon. The receptionist that answered the phone was there only to set up appointments for a loan officer to come to the homes of applicants to give a presentation and complete the paperwork for applying for a VA streamline loan. The receptionist could not answer any questions about the loan terms, closing costs, VA funding fees, etc. The only information that the receptionist could offer me is the current rate on a 30-year mortgage rate is 4.5% for a “very limited time,” the history of the company and that the owner of the company was a retired Marine. When I started to get annoyed with not having my questions answered the male receptionist switched me to a female (a sales technique widely used to lure customers based on the gender of the caller). Out of curiosity and to better inform Marines of this refinancing option I decided to set up an appointment. The receptionist set up an appointment for the following day and said that it would only take 15-20 minutes of my time.
Prior to the loan officer arriving at my home, I was able to speak to another Marine who had previously looked into this type of loan. This Marine told me that the offer was valid, but that the closing costs were extremely high ($8,000 in their case). To prepare for the meeting, I reviewed questions to ask in regards to a mortgage loan, and looked at what kind of offer this company would have to give to me in order to make the loan a good deal for me. In addition, I decided to set the actual location of the presentation. I decided to keep the meeting outside of my house just in case this became one of those people that was too pushy and wouldn’t leave.
The loan officer arrived at my home right on time from Wilmington. He was in a nice car, dressed in business casual with a name tag, leather brief case, and a portable turn-chart of slides. He was very courteous and ready to present his offer. I had a small table and chairs set up on my front porch. My wife and I decided that she would not sit in on the presentation. The loan officer tried to bring her into the presentation (a sales technique used to draw a WOW factor from a wife when the big punch lines of the presentation were made).
I immediately informed the loan officer that I had done my homework and that he had to offer me a 30 year 4.5% fixed rate with less than $5,000 in closing costs. His response told me that he could not. However, I let him proceed with the presentation. Everything went just as I had seen before in many other financial presentations. He gave the history of the company to include that the owner was a retired Marine interested in helping other Marines. None of this really matters, because there are a lot of interesting and attention-gaining facts that have nothing to do with how our life is going to be better if I decide to go with this company.
About halfway through the turn-chart the loan officer asked if I had a monthly mortgage statement, and pay stub or LES that he could use to work out the numbers to illustrate for me how much money he could save us. I did not let him have any of this information. I knew what I was paying in the loan, how much I owed, what my interest rate was, and he had no business knowing what was on my LES or pay stub. In addition, I wanted to know what he had to offer and not what the last company gave me.
He proceeded to punch numbers into a fancy looking calculator that had preformatted financial formulas in it, and wrote down numbers on one of the slides to show me what I was currently paying each month, and the interest over the life of the loan (Who cares. This is information someone already knows about their loan). He flipped the slide and filled in more numbers from his high speed calculator that showed what kind of money I would save if I took his offer. In addition, this slide had subtitles underneath each number that said things like “I will show you how to save even more money”. By just looking at the numbers and trusting what he had said to this point it all looked very good on paper.
I asked to see what the closing costs were going to be. They should have been cheap since I wouldn’t have to do any of the inspections or appraisal. However, they were outrageous. The total was over $10,000 for my $187,000 loan. This will vary depending on the amount of the loan each individual needs. If evaluating this option on your own, you can use a point factor of 5.5% of the loan amount.
Because I had done my homework I knew that he would have to offer me a loan with about $5,000 in closing costs, and knew that this was not a good loan for me. The loan officer tried to play the good guy and show me other options, but could not offer me what I needed for me to be in better position.
In closing he asked me to use my phone to call his boss to confirm that he had made the appointment and discuss the outcome. During this phone call the loan officer back briefed his boss, in Raleigh, on the line by line details of my current situation, how much his presentation figured that I could save each month and over the life of the loan, etc. I could hear the boss on the other end of the phone and it was like a bad movie. The boss spoke loud enough for me to hear his responses of “Wow, that is GREAT!” and “Amazing”. When the loan officer told his boss that I had a better deal and was probably not right for this loan, the boss asked to speak with me. The boss tried to tell me that the loan officer was a great guy, and that he made me the best offer on the market. In addition, he tried to tell me that the offer I said I had was not going to happen and that VA streamline offer of 4.5% was not going to last long. Basically, a bunch of high pressure antics to get me to act now. As a final attempt, the boss again told me that the owner of the company was a retired Marine and that he bought the business solely to help military people. Again a last-ditch effort to get me to react to the Marines helping Marines.
The loan officer realized that I was not going to fall for any of his high pressure sales techniques and that I was making a very educated decision, he left. In all, he was on my front porch for about an hour. Forty minutes longer than was promised by the receptionist. He also used my phone to call his boss long-distance in Raleigh.
One of the things that the loan officer and I discussed is who this program is good for. It may be hard to believe at a cost of $10,000, but there are people that could use this loan to their benefit.
The loan officer will tell the borrower that the closing costs can be rolled up into the loan. That means that interest will be paid on that money for the life of the loan or until enough extra to payments can be made to pay down the closing costs. The bottom line is that the loan amount will increase by the amount of your closing costs, and over a 30 year period $8,240 in interest on the $10,000 loan for closing costs.
The techniques to pay down the loan and save a lot of money suggested by the loan officer that are real benefits are to take all refunds offered by this refinance and put them towards closing costs, continue to pay the original loan’s monthly payment, and pay extra if you can each month or at tax refund time. All of these are great techniques and should be used. However, many of the initial benefits of the loan are eroded. For example, the escrow refund, and reduced payment would have been mentioned as a benefit that would allow a borrower to pay off other debt, buy a new car, do repairs to the home, etc. All of that goes away when applying extra cash to the new loan.
If a borrower were to take the $10,000 for closing and instead apply that to the original mortgage, they would save a lot of money in interest on that loan. For example, $10,000 of principle on my mortgage would cost me $9,329 in interest over 25 years. I would immediately save that money if I applied to my current mortgage. In addition, if I paid an additional $100 per month for the remaining 20 years of my loan I would save and additional $25,713 in interest.
Downfalls of this deal:
- Extremely High closing costs
- Even though you get to skip one or two payments, you will still be responsible to pay the interest on the original loan for that period. That payment will have to be made at closing.
- Loan term goes back to 30 years increasing the time that you have to pay interest on your home.
- Most people will have to finance the closing costs into the new loan. In most cases this will put a borrower upside down on their home.
This loan is suited for people that are in the following situations:
- If you absolutely must refinance now to avoid foreclosure, and cannot qualify for a conventional loan with lower closing costs.
- If you have a rate of more than 7%, have only been in the home for a short period, and are going to stay in the home long enough to hit the break even point (break even point is when the amount of money saved on monthly payments is equal to the amount of closing costs paid).
- If you are going to stay in the home long enough to hit the break even point. In closing, there are a lot of factors to take into consideration when looking at this type of loan. It is not a good solution to refinancing for most people that have VA loans. However, it will be made very appealing to all by the loan officer. This information is provided as an aid to insight on sales techniques, and a look at the loan package from a different angle. If you have any questions regarding this type of loan or any other financial issues, please feel free to contact your Command Financial Specialist.