The VA loan, which makes homeownership easier for thousands of veterans, is one of the most popular military benefits. After you buy a home with a VA loan, you may want to reduce your monthly mortgage payments or change the way you pay off the home.
You can sometimes reduce your monthly VA loan payment by refinancing it at a lower interest rate or by moving from a variable-rate loan to a fixed-rate loan. Whatever the reason for refinancing your VA mortgage, you need to consider the pros and cons that apply to your situation.
VA Interest Reduction Refinancing Loan
The Interest Reduction Refinancing Loan, or IRRRL, is for those who want to refinance an existing VA loan into a new VA loan. A VA IRRRL is also often referred to as a streamlined refinancing because the process has been simplified so that borrowers can close quickly.
To qualify for an IRRRL, the interest on your new loan must be lower than your original loan — but a lower interest rate is often why people choose to refinance. You can also use this VA refinancing option to move from a variable rate mortgage to a fixed rate mortgage.
IRRRLs pack the closing costs into your new loan, saving you the initial cost.
Refinance VA Cash-Out
With a payout refinance, you can also refinance into a VA loan from another VA loan or a conventional loan. It’s a great option for veterans and service workers who haven’t yet taken advantage of their VA benefit and don’t want to buy a new home in return. With a payout refinance, you can also take cash out of the home’s equity to use for a renovation, paying off debt, or some other financial purpose.
Note: If you’re refinancing from a conventional loan to a VA loan, lenders will refer to it as a “cash-out refinance,” even if you don’t plan on taking equity out of your home. This is simply because you cannot streamline a VA refinancing with a conventional loan.
Keep in mind that the home you want to refinance with a VA loan must be your primary residence. In addition, unlike the IRRRL, you cannot include closing costs in your loan with a payout refinance.
VA refinance financing costs
Another consideration to make is how the VA financing costs play into your refinancing. Here’s the breakdown for both IRRRL and payout refinances:
VA Refinancing Type Financing Fee for First VA Loan Financing Fee for Second VA Loan IRRRL (Streamline)0.5%0.5%Cash Out Refinance2.3%3.6%
How Much Does a VA Refinance Cost?
If you’re refinancing an existing VA loan with a payout refinance, expect to pay a 3.6% borrowing fee unless you’re exempt. The 2.3% payout fee rate applies to those who use their VA loan benefit for the first time.
For example, if you bought your first home with a conventional mortgage and are now refinancing into a VA loan with the VA Payoff Refinancing, you only owe 2.3% VA borrowing costs.
Alternatively, the IRRRL has a 0.5% financing fee for the first and subsequent uses of VA loans. However, expect to pay closing costs, such as property insurance and real estate costs.
When can I refinance with the VA loan?
The VA requires you to wait at least 210 days from your first loan payment on your original mortgage until you can close your new VA refinancing. This waiting period is known as “seasoning” and can vary by lender. Some lenders require 250 days between the payment of your first mortgage loan and the closing day for your VA refinancing.
Do I need to refinance my VA loan?
It doesn’t matter what type of mortgage you have, if interest rates are at least a point lower now than when you got your loan, refinancing can be worth the time and effort.
Compare current rates for VA home loans
You can reduce your monthly payments by refinancing over the same number of years as your original mortgage. However, this extends how long you will pay and increases the amount you pay in total interest over the course of your mortgage. Paying more than the monthly payment can help you pay off your mortgage faster and lower the total interest you pay.
If you have an ARM, your interest rate may be higher than the current fixed mortgage rate. In this case, you will probably benefit a lot from refinancing your mortgage and getting a lower, fixed interest rate.
If you have a first and second mortgage, refinancing into a single mortgage can consolidate your monthly bills, help you save money, and make paying bills easier.
However, if you know you’ll be moving in a few years, refinancing may not make sense because you won’t have time to recoup the savings, especially if you add years to your mortgage.
This post Advantages and Disadvantages of Refinancing a VA Loan
was original published at “https://themilitarywallet.com/pros-and-cons-of-refinancing-a-va-loan/”
