Why would a soldier or veteran pay almost $20,000 more than necessary on a mortgage? One mortgage company, NewDay USA, advertises that servicemen and women may want to add a pool for the grandkids, or consolidate some expenses. They advertise to those with VA benefits (soldiers and veterans) to utilize NewDay USA VA 100 Cash Out loan “…to help more veterans.” When a potential applicant looks at the numbers however, there are several costly red flags to what NewDay USA is proposing.
We see many companies that offer some interesting marketing campaigns. The advertisements for NewDay USA show lots of veterans smiling in front of their home. The company contends that it is looking out for the military servicemen’s and women’s best interests.
Let’s take a look at this advertisement. Most veteran’s use their VA benefit when they purchase a home. Any second, third or additional use of a VA benefit is called a ‘second use.’ Subsequent uses of the VA benefit substantially raises the costs to the VA homeowner.
Here is an example. There are two VA loans; one at $300,000 and a second at $400,000. NewDay’s USA says that their average cash out VA loan is $60,000. Any money taken out basically above and beyond the current mortgage balance on a refinance is considered a “Cash Out.”
The problem is that VA loans have a funding fee whenever a VA loan is taken out and for different purposes. When a veteran takes money out on a cash out refinance of their mortgage, the VA funding fee on a second use VA loan jumps to 3.6% of the loan amount. For a $300,000 loan, the VA funding fee would be $10,800. For a $400,000 loan, the VA funding fee would jump to $14,400.
Now add the closing costs (appraisal, title and origination) of a VA loan (say 2% on average), the $300,00 loan would have closing costs of $6,000. For a $400,000 loan, the closing costs would jump to $8,000.
So the total closing costs for a $300,000 VA cash out refinance is $16,800. For a $400,000 VA cash out refinance, the closing costs would be $22,400. If the average cash out for a VA loan according to NewDay USA is $60,000, that is an exceptionally high cost to take $60,000 out. That is a lot!
Practically no veteran is going to do a VA cash out unless it is the only option. There are other cash out options to consider such as a second mortgage or convert the mortgage to a conventional loan (Fannie Mae / Freddie Mac). Such mortgages do not have funding fees. Since NewDay USA only does VA mortgages, this option os often overlooked.
NewDay USA probably does well for those using their VA benefit for a home purchase or a rate deuction refinance of the mortgage balance. With interest rates going higher, the demand for mortgages has dropped considerably. Mortgage companies are now looking for other ways to generate business.Having servicemen and women pay an exceptional cost to generate more business is not good.
The problem with NewDay USA Mortgage company’s advertisement is that it takes advantage of any veteran’s equity in a home loan – just to make their company a little more money. Unless the VA 100% cash out is the only option for a service member, there are much better options that are a lot less costly.