I’ve been doing a lot of reading on Dave Ramsey’s website lately as one of my colleagues is a fan. I have to say that I like much of what he writes about living debt free and money management, but I found one thing while reading today that I did not agree with.
What Dave Is Wrong About…
Dave is not a fan of the VA loan. And, he makes a claim on his website that is simply not true: “VA interest rates are usually higher than conventional loans.” In fact, VA loan interest rates are often times much lower than conventional interest rates, from a .25% to a full 1% lower, depending on the characteristics of the loan and the borrower’s credit score.
I priced out a loan amount of $190k with an LTV of 95% and a credit score of 740 today, and the VA loan was a half point lower in this scenario. Yes, there may be scenarios where the rates are similar or even where the VA interest rate is a little higher, however, a blanket statement that VA interest rates are usually higher than conventional loans is just plain inaccurate.
What Dave Is Also Wrong About…
Dave also says that “VA loans have a lot of fees.” The VA loan has one fee, the funding fee. It varies based on the type of loan and veteran status. You can see the chart here which explains the different fee percentages. Some veterans are also exempt from the funding fee.
Other than the funding fee, all of the other fees are the same as any other loan. So, there’s one additional fee above and beyond a conventional loan ( FHA has its own version of this fee). And, based on the scenario above with a 740 credit score, it would cost a borrower 3.5 points to get the VA interest rate that was a half point lower on the conventional loan product. 3.5 points based on a $190,000 loan would be $6,650 which is higher than the VA funding fee could ever be based on the chart as the range is from 0%(exempt) to 3.3%.
Also, the VA limits certain fees that lenders are normally allowed to charge the borrower as explained here, so you could end up paying less in fees than with another loan.
What I Think…
The VA loan product may not always be the best option for a borrower; however, a lot of the time it is. I don’t think that because of its funding fee you should disregard it completely as a viable option for financing your home purchase. I also don’t agree with Dave’s blanket statement that VA loans are a trap. When used properly, borrowers can save a lot of money over the life of the loan with lower interest rates than they would be able to qualify for going the conventional route. Also, if they have less than 20% to put down, they could save a small fortune in mortgage insurance.
When you select the best mortgage product for you, so many factors need to be taken into consideration: your down payment, how long you anticipate living in the home, etc. A good mortgage advisor will review these factors when recommending different mortgage options for you using amortization calculators to figure out how much you will end up paying for the home in the long run. A VA loan might be right for you and it might not, but there is not a one size fits all product when it comes to mortgages.
What I Like About Dave…
I like his take on the 15 year mortgage and that more home buyers should consider them. Many borrowers get a 30 year thinking they’ll make extra payments, and then life happens: their car breaks down, their dog eats their couch, their roof needs to be repaired, etc. Those extra payments they were going to make go down the drain. When you get a 15 year mortgage, you have to make those payments, so you will.
If you have any questions about what mortgage product is the best for you, please contact me. I am licensed to work with borrowers in the entire state of Virginia. I can also refer you to other mortgage advisors I know and trust on the East Coast.