Our military personnel are particularly vulnerable to financial misfortune, and perhaps housing (typically known as our biggest investment) is the best example of this vulnerability. Housing is a complex subject, full of cryptic acronyms, program names and complicated definitions. On top of this, the men and women who serve our country often find themselves in unique financial situations, and the advice for the general public might not be the advice that best suits their needs. the podcast below, along with our definitions, aims to help make sense of these issues and their complications.
Why do we need financial education geared specifically toward this group? The short answer is that they are more heavily targeted by predatory financial products and services and they aren’t given adequate financial education. A recent Department of Defense study, for example, found that 11 percent of our military are still using payday loans and vehicle title loans, borrowing somewhere in the ballpark of 36 percent interest. On top of this, our armed forces is a rather young group, with almost 40 percent being ages 25 and under and with a starting salary of around $18,000. This group might be even more vulnerable, particularly if they haven’t received adequate education about housing and its role in an individual’s overall finances.
Here is this week’s podcast episode, which takes a deeper at these issues and provides some key terms.
Podcast 1: Familiarizing you with basic mortgage terms and language.
Let’s take a closer look at the key housing terms this group needs to be familiar with, along with their definitions.
Servicer: The borrower’s primary point of contact. The company that collects principal and interest and manages the escrow and other administrative, customer-facing functions on behalf of the lender or holder.
Fannie Mae and Freddie Mac: Fannie Mae and Freddie Mac are non-bank entities who supply home mortgage funds (lenders). They work with mortgage brokers and bankers who then manage the loans.
FHA: The Federal Housing Administration is a federal agency created by HUD to insure certain loans and make loan guarantees to make more housing available. These loan options are sometimes borrower’s most realistic financing option.
Escrow: A portion of your mortgage set aside each month to pay for insurance premiums and taxes. This is typically managed by the servicer and the amount of the escrow can change as tax rates and assessments and insurance premiums change.
Homeowner’s insurance: Protects against disaster, theft/vandalism, etc. This is typically required by mortgage lenders before closing a loan. It can be more expensive or require additional policies if you live in an area subject to natural disasters (such as an area that floods frequently or is near a large body of water).
Mortgage insurance (MI or PMI): Insures against default or non-payment of a mortgage. Different loan types and different amounts of down payments can influence how much insurance you pay. Generally speaking, PMI stops once a borrower has established 20 percent or 22 percent equity in the home.
Mortgage Insurance Premium (MIP): This type of insurance can be thought of as PMI but for FHA loans only. It is either paid upfront or on a monthly basis. The rules for when MIP can be stopped have changed greatly in recent years. Now, if you make a downpayment of less than 10%, you will pay MIP for the life of the loan. Pay more than 10%, and you will pay MIP for 11 years of the loan.
Mortgage modification This allows homeowners to keep the home but change the obligations. For instance, the interest rate can go down. This can sometimes be done without a true refinance, which saves on closing costs.
Refinance: This creates a new loan entirely on the same property, often in an effort to make the mortgage more realistically affordable for the homeowner.
Short sale: The servicer accepts less than the total of what the borrower owes on the property. Note, this can have a detrimental effect on the borrower’s credit.
Deed in lieu of foreclosure: Grants the title of the deed back to the servicer to avoid foreclosure. Lender stops foreclosure activity and minimizes negative credit impact.
Remember that we will be covering more topics related to off-base military housing over the coming weeks. Be sure to check back for our next post!