Cash Out Refinancing — VA or FHA? Which loan is better?

 

If you’re a veteran or military spouse entitled to a VA Home Mortgage Loan, you may be faced with a difficult decision:  which mortgage loan is more advantageous to you, VA or FHA? Each type of government loan has government fees associated with it.  With a VA loan, it’s the VA Funding Fee.  For an FHA loan, it’s the Up Front Mortgage Insurance Premium (UFMIP) and the monthly Private Mortgage Insurance (PMI.)

 

So, which is better? Let’s take an example.  The results may surprise you!

 

Here are the salient facts for our example:

 

• Property Value 150,000
• Borrower’s current mortgage payoff is $112,515
• Borrower wants maximum cash out
• Subsequent Use of VA loan (she already used her VA home loan benefit once before)
• Interest rate on both VA and FHA loan = 5.5%
• 30 year fixed rate term

 

In an FHA loan, the maximum cash out loan-to-value percentage is 95%.  With a value of $150,000, that gives us a base loan amount of $142,500.  What about that UFMIP?  That gets financed in on top of the base loan amount, giving us a total loan size of: $144,943  - with the UFMIP totaling $2493.  The UFMIP percentage in this example is 1.75% because of the loan being over 15 years and greater than 90% loan-to-value.

 

We will pay off the current mortgage balance with the new loan, as well as give HUD their UFMIP ($2493) and roll in the closing costs.  How much are closing costs? Good question! On an FHA loan, they happen to be higher? Why, because one of the benefits of a VA loan is that the VA has mandated very low closing costs and have strict guidelines for lenders and broker charged fees. In this example, the FHA closing costs, prepaids (interim interest and hold back amounts for establishing escrow) total $6000.

 

The math looks like this: total loan amount of $144,943, less UFMIP of $2493, less closing costs and prepaids of $6000, less mortgage payoff of $112,515 EQUALS cash back to borrower of $23,935. 

 

The monthly principal, interest and PMI payments on this 30 year fixed rate mortgage note are $889, which includes a monthly PMI payment of $65 for the life of the loan.  Over 30 years, the borrower will pay back a total of $320,400.

 

In a VA loan, the maximum cash out loan-to-value percentage is 100%.  That gives us a base loan amount of $150,000.  Rolling in a 3.3% VA Funding Fee puts the total loan at $154,950 with the VA Funding Fee equaling $4,950.  The VA Funding Fee was calculated based on a regular service veteran’s subsequent use of the benefit.

 

Again, we’ll payoff the current mortgage, give the VA the Funding Fee and roll in the closing costs.  In the case of the VA loan, as stated earlier, the closing costs are less.  In this case, the closing costs and the prepaids total $4,333. 

 

The math looks like this:  total loan amount of $154,950, less VA Funding Fee of $4,950, less closing costs and prepaids of $4,333, less mortgage payoff of $112,515 EQUALS cash back to borrower of $33,152.  That’s a difference of $9,217 more cash back to the borrower!

 

The monthly principal and interest payments on this 30 year fixed rate mortgage note are $880.  Over 30 years the borrower will pay back $316,800.  That is a difference of $3,240 to the borrower’s benefit.  When you combine the savings over the life of the loan repayment of $3,240 with the additional cash back at closing of $9,217 – you get a total cost savings advantage to the VA loan borrower of $12,457. 

 

Based on overall savings, the VA loan outperforms for this borrower. Oh, and how would a consumer make this determination without having amortization tools at her disposal? By comparing the APR! The APR on the FHA loan is 6.502% and on the VA loan it is 5.66%  When all else fails, compare the APR.

Tags: VA Cash Out Mortgage