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Low VA Rates and Assumable Loans

By: Grant Moon 08/06/14 10:44 am

Are you one of those that used the VA home loan to purchase a property say five, six or seven years ago? If so, it’s very likely that you refinanced since then as rates fell to an historic low back in January of 2013 and while current VA mortgage rates are higher now they’re not higher by very much. Yet there’s another bonus a low rate on a VA loan has other than the obvious lower monthly payments—it provides value to your home. How?

VA loans have an assumability feature. That means someone can assume your existing VA home loan should you sell to them. With other loan types a buyer must obtain financing from a lender and sign closing papers for their new loan. However, the buyer also has an option, with your permission of course, to start the paperwork to assume your loan. And if your interest rate is say 4.00% on a $200,000 loan, when rates go up in the future there’s a lot of value in that, especially if rates get back into the 7.00% range we saw back in 2008.

The principal and interest payment with a 4.00% rate on $200,000 is $954. If you sell your home in the future for say $220,000 and the buyers seek conventional financing with 10% down, the principal and interest payment on a $198,000 loan at 7.00% is $1,317 not counting the additional mortgage insurance. That’s around $500 more per month for a borrower to obtain outside financing. That makes your home as well as your mortgage very, very attractive.

Buyers who assume an existing VA loan must still qualify and go through the assumption process and it’s important to note that an assumption does not restore your VA home loan entitlement and you can’t use your entitlement again if and when your buyers refinance out of the assumed loan or sell the property, retiring the note.

VA assumptions today are very few and far between and when buyer assume the note they assume the existing balance and must come to the closing table with some down payment funds. But there are times when an assumption makes complete sense for the buyer as well as the veteran.

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