The VA Home Loan program offers active and veteran service members access to lower mortgage interest rates and the ability to purchase a home with a smaller down payment. Buying a house with a government-backed VA loan is a smart decision if you qualify, but what happens if you want to refinance? Many Americans consider refinancing their mortgages each year to get more favorable mortgage terms or lower monthly payments, with 22% of Americans doing so in 2021.
The Department of Veterans Affairs offers two generous refinancing options for VA Loan recipients. Even if your income has gone down or your home has lost value, you may be able to refinance your VA loan through one of these options. Whether you’re in need of a quick influx of cash or you want a lower monthly payment, refinancing a VA loan is a good option.
In this piece, we discuss the two primary ways to refinance a VA loan and offer a third option of refinancing into a conventional loan. No matter what your goal, you’ll have the information you need to make the best refinancing decision for your budget.
Refinancing a mortgage can be a good idea for a number of reasons. When you refinance, you essentially renegotiate the terms of your mortgage based on the equity you’ve gained in your home, changes in your financial situation, changes in the home’s value, and marketplace interest rates.
As such, refinancing can have a number of benefits, including:
Qualifying for a VA loan in the first place has its own set of eligibility requirements, and they’re not too different from the refinancing requirements. They include:
As we mentioned, there are two primary types of VA loan refinancing: Streamline and cash-out refinance.
A VA streamline refinance is also known as an Interest Rate Reduction Refinance Loan (IRRRL). This is the right option for you if you already have a VA mortgage and want to save money by refinancing to a lower interest rate or change from an adjustable-rate mortgage to a fixed-rate mortgage. You can refinance regardless of your present financial situation or home value and may still get a lower interest rate and/or monthly payment.
This type of refinancing also requires little paperwork and hardly any costs out of pocket; you can simply roll closing costs into your overall loan amount to pay them off over the lifetime of the loan. IRRRLs carry a 0.5% refinancing fee.
When you refinance into an IRRRL, the rate must be lower on your new loan, unless you’re refinancing out of a VA loan with an adjustable rate. It’s basically a simple way to lower your monthly payment.
One reason why IRRRLs are particularly useful for service members is that your home doesn’t have to be your primary residence. You just must have lived there at some point. So, if you’re stationed somewhere new but don’t want to give up your first home, you can refinance the mortgage without actually living in the home. That’s a key difference from conventional refinances.
IRRRLs can also help you catch up on delinquent payments and late fees. However, if you’re more than 30 days behind, the refinance will require credit underwriting.
The other common VA loan refinance option is a cash-out refinance. This option is best for tapping home equity to get quick access to cash. Cash-out refinances are available to any qualified veteran homeowner, as well, regardless of whether they have a VA, FHA, USDA, or conventional loan.
A VA cash-out refinance requires less home equity to qualify than a conventional cash-out refinance, meaning even if you’ve only owned your home a few years, you may be eligible. In a conventional refinance, you’d typically have to retain at least 20% of your equity in the home to borrow up to 80% of the home’s value. A VA cash-out refinance, on the other hand, allows you to borrow up to 100% of your home’s value.
This kind of refinance can be a huge asset if you have a child going off to college, you want to renovate part of the house, or an unforeseen debt comes to pass.
A VA cash-out refinance will have more stringent lender requirements than a streamline refinance, however. Lenders will require a minimum credit score and a VA home appraisal, and the home must be your primary residence. Also, there is a 2.3% refinancing fee, and you’ll have to pay all the closing costs upfront; you can’t wrap them into your monthly loan payments. You can, however, use some of the cash you receive from the refinance to pay closing costs.
If you qualify, you can also refinance a conventional loan into a VA cash-out refinance loan. That also works the other way, which brings us to our third refinancing option.
If you have at least 20% equity in your home, your best option may be to refinance your VA loan into a conventional loan. That will help you avoid paying the VA funding fee and, as long as you have 20% equity, you won’t have to pay private mortgage insurance (PMI). Provided you can get a lower interest rate from a conventional lender, these benefits may help you get a lower monthly payment.
Another reason to consider refinancing into a conventional loan is because it restores your full VA entitlement. That means you can use a new VA loan to purchase your next primary residence while keeping your refinanced home as an investment property.
Most Americans consider refinancing their mortgages at some point to either tap their home equity or get a lower monthly payment. When you have a VA loan, there are two primary refinancing options, each with its own perks. You might find, however, that refinancing into a conventional loan is an even better option. Whatever you choose, this guide can serve as a resource for your decision-making.
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