Comparing the Benefits and the Downfall of a VA Refinance Loan

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Written by J. Wallace Jr.   
Monday, 25 April 2011 14:53

Comparing the Benefits and the Downfall of a VA Refinance Loan

 

Stanley Wilson Retired from Veterans Administration Washington DC

Staff Writer for VA Loan News

4/20/2011

Using a VA refinance loan can help you, if you qualify. While there are some very beneficial things about these loans, they also have a few pitfalls associated with them. Here are a few benefits and pitfalls of VA refinance loans.

Benefits

One of the main benefits of utilizing a VA refinance loan is that you can eliminate private mortgage insurance. Private mortgage insurance, or PMI, is one of the most common expenses that is associated with mortgages. It is often required by traditional lenders. This is basically a type of insurance policy on the loan itself against default. If the borrower defaults, the private mortgage insurer will pay the lender back for the loan. However, with a VA loan, the government is backing the loan. Therefore, if you default on the loan, the government will insure the lender against loss. This can save you quite a bit of money on your monthly mortgage payment overall without this added cost.

Another benefit of this type of loan is that you will not have any prepayment penalties. Many loans have a prepayment penalty associated with them that could be substantial if you try to pay off the mortgage early. If you plan on paying off your debt sooner than the loan term, this can be a very good feature to have.

A VA refinance loan also carries with it flexible approval standards. Since the government is going to be guaranteeing the loan for you, the lender is much more likely to be lenient with you. As a result, they will approve some people for refinance loans that may not have perfect credit or an ideal debt scenario. This opens the door for many more people to get the refinance loan that they need.

Downfall

Many VA loans carry with them the ability to be assumed by another buyer. This means that if you try and sell the house, you can let someone else simply take over your loan without them having to go through the normal loan processing. While this might sound easier for you as a seller, it actually puts you at more risk. If the person that buys the home from you defaults on the loan, your credit will be damaged. In addition to the credit risk, it also could prevent you from being able to purchase your next property. The VA will only allow you to borrow a certain amount of money based on your credit. Until that initial loan is paid off, you may not be able to borrow any money in the meantime. You may only be able to borrow the difference between what you owe on the first loan and what your credit limit is.

Loan limits are another factor that leave many buyers looking at other options. A VA loan will guarantee up to 25% of the loan up to $417,000. If you get a loan above that amount, you will have to come up with a 25% down payment on the difference of the loan. 

Current VA home loan rates can be found at http://www.currentvaloanrates.com/ for either a VA Loan Home Mortgage Purchase or VA Loan Home Mortgage Refinance.