The VA loan, which makes homeownership more easily attainable for thousands of veterans, is one of the most popular military benefits. After you purchase a home with a VA loan, you may want to reduce your monthly mortgage payments or change how you pay off the home.
You can sometimes lower your monthly VA loan payment by refinancing it at a lower interest rate or by changing from an adjustable-rate to a fixed-rate loan. Whatever the reason for refinancing your VA mortgage, you should consider the pros and cons as they apply to your situation.
VA Interest Rate Reduction Refinance Loan
The Interest Rate Reduction Refinance Loan, or IRRRL, is for those who want to refinance an existing VA loan into a new VA loan. A VA IRRRL is also commonly referred to as a streamline refinanc, because the process is simplified so borrowers can close quickly.
To qualify for an IRRRL, the interest rate on your new loan must be lower than your original loan’s – but a lower interest is often why people choose to refinance. You can also use this VA refinance option to switch from an adjustable-rate mortgage to a fixed-rate mortage.
IRRRLs wrap closing costs into your new loan, saving you the up-front expense..
VA Cash-Out Refinance
A cash-out refinance also allows you to refinance into a VA loan from another VA loan or a conventional loan. It’s a great option for veterans and service members who have not taken advantage of their VA benefit yet and don’t want to buy a new home to do so. A cash-out refinance also allows you to extract cash from the home’s equity to use toward a renovation, paying off debt or another financial goal.
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 intend to pull equity out of the home. This is simply because you cannot use a VA streamline refinance with a conventional loan.
Keep in mind that the property you wish to refinance with a VA loan must be your primary residence. Additionally, unlike the IRRRL, you cannot wrap closing costs into your loan with a cash-out refinance.
VA Refinance Funding Fee
Another consideration you’ll need to make is how the VA funding fee plays into your refinance. Here’s the breakdown for both IRRRL and cash-out refinances:
|VA Refinance Type||Funding Fee for First VA Loan||Funding Fee for Second VA Loan|
How Much Does a VA Refinance Cost?
If you are refinancing an existing VA loan with a cash-out refinance, expect to pay a 3.6% funding fee, unless you are exempt. The 2.3% cash-out funding fee rate applies to those who are using their VA loan benefit for the first time.
For example, if you purchased your first home with a conventional mortgage and are now refinancing into a VA loan with the VA cash-out refinance, you would only be subject to a 2.3% VA funding fee.
Alternatively, the IRRRL has a funding fee of 0.5% for first time and subsequent use VA loan use. However, expect to pay closing costs like title insurance and real estate fees.
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 on your new VA refinance. This waiting period is known as “seasoning,” and it can vary by lender. Some lenders require 250 days between your first home loan payment and closing day for your VA refinance.
Should I Refinance My VA Loan?
No matter what kind of mortgage you have, if the interest rates are at least a point lower now than they were when you obtained your loan, refinancing may be worth the time and effort.
Compare Today’s VA Home Loan Rates
VA Loan Rates
You could lower your monthly payments by refinancing for the same number of years as your original mortgage. However, this will extend how long you’ll be making payments and increase how much you’re paying in total interest over the course of your mortgage. Paying more than the monthly payment would allow you to repay your mortgage faster and reduce the total interest you pay.
If you have an ARM, you may find your interest rate is higher than current fixed mortgage rates. In this case, you will probably benefit greatly by refinancing your mortgage and getting a lower, fixed-interest rate.
If you have a first and second mortgage, refinancing into a single mortgage could consolidate your monthly bills, help you save money and make bill payments easier.
However, if you know you will be moving within 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.