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Here Are the Benefits of Refinancing a VA Loan
Military members and their families know more than anyone how important timing is when it comes to buying, selling and moving. If you’re looking to refinance your home, a VA loan refinance offers the potential for better mortgage terms for qualifying military members and veterans.
There are two options to choose from when it comes to VA refinances, and the right fit for you will depend on your current mortgage and your goals for your veteran home loan refinancing. Whether you’re ready to switch to a VA loan, cash out equity or lower your payments, you have choices available.
Before you refinance with any type of loan, though, it’s important to find out whether the refinance makes financial sense. You also need to know how VA loans stack up against traditional refinancing and which program offers you the most benefits to make the best choice for your family.
What is a VA loan refinance?
There are two types of VA refinance loans to consider. The first is an interest rate reduction refinance loan (IRRRL), which is also called a streamlined refinance. You can use this type of loan on an existing VA loan to either qualify for a lower interest rate or switch from an adjustable loan to a fixed rate.
A cash-out refinance can be used on both VA and non-VA loans. You can use it to cash out some of your home equity and pay for things like debt, school, home improvements or other life events. Alternatively, you can use this refinance simply to transition from a traditional mortgage to a VA loan, even without tapping into your equity.
Both types of veteran home loan refinancing differ from a conventional loan in that the requirements are more flexible. VA loans never require a down payment and the credit score requirements are also more flexible. Plus, interest rates are typically lower compared to conventional mortgages.
In order to qualify for either VA refinance option, you’ll need to meet the service eligibility requirements, which includes current military members, veterans and eligible spouses. You can use your Certificate of Eligibility (COE) that you used for your existing VA home loan if applicable.
How a VA loan refinance is different from other types of refinancing
The IRRRL option has a streamlined process, which means that it’s easy to complete the refi since you’ve already qualified for a VA loan. You’ll still need to provide your COE, but you don’t need a new one for a refinance. The one caveat is that your new loan must actually provide you with some type of benefit, either in the form of lower monthly payments or a lower interest rate.
Neither type of VA refinance loan has a requirement for extra mortgage insurance, which is what you’ll have to pay for with all FHA loans or for conventional loans when your down payment is less than 20%. You’ll pay a funding fee instead.
This VA funding fee is charged as a percentage of the loan amount. How much you pay depends on whether it’s your first VA loan or a subsequent application. You’ll be charged a higher rate if you’ve already used a VA mortgage in the past. This is a one-time fee paid at closing, rather than an ongoing fee charged annually (like mortgage insurance).
VA loan benefits
Military members and veterans can take advantage of a number of benefits that are unique to VA loans. Benefits typically gained by refinancing include things like cashing out home equity or saving money with a lower interest rate. On top of those potential perks, here are some features that are unique to VA loans.
- Funding fee is a one-time expense — This is compared to ongoing mortgage insurance that’s required with other types of loans in certain circumstances.
- Option to roll closing costs into the new loan — This is only available with an IRRRL loan. Alternatively, you may opt for a higher interest rate to reduce upfront closing costs.
- Jumbo loans available for high-cost areas — In most regions in the U.S. anything over $510,400 is considered a jumbo loan. In Hawaii, Alaska and other expensive regions, jumbo loans start above $765,600.
Why refinance a VA loan
There are several reasons to consider refinancing your VA loan with a new mortgage. The first is to potentially qualify for a lower interest rate. Check to see if VA refinance rates have lowered since you received your first loan. Also look at your credit score. Even if rates haven’t dropped dramatically, you could qualify for a better rate if your score has improved over time.
[ More: VA Loans vs. Conventional Loans ]
Another benefit is that refinancing will let you take advantage of the equity you’ve built in your home. Whether you’ve been making payments for a few years or real estate values have risen in your home, your loan-to-value ratio may be lower than it was. That could qualify you for a cash out refinance if you have upcoming financial needs.
When not to refinance your VA loan
As with any refinance, you need to make sure the savings and benefits outweigh the closing and other costs that are involved. Think about how long you’ll be in your home. If you move frequently and only plan to be in the home for a few more years, the costs involved may be more than the short-term savings.
To figure this out, find out the total costs you’ll have to pay and then divide that by the monthly savings you anticipate. That shows you how many months it takes to recover your costs. If your closing costs come to $3,000 and your monthly savings are $200, it would take 15 months to actually start saving money on the refinance.
Also note that the funding fee increases after your first VA loan. The first VA loan you take out only has a funding fee of 2.3% of the loan amount, but that jumps to 3.6% each additional time you use this benefit.
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