Pros and Cons of Refinancing a VA Loan

Is this a good time to refinance your VA Loan or home mortgage? 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. Check these tips to see if refinancing is right for you.
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VA Loan refinance pros and cons

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.

Table of Contents
  1. Should You Refinance a Mortgage?
    1. Has your credit score improved?
    2. Are mortgage interest rates increasing?
    3. Are you having trouble making your payments each month?
    4. Do you need to consolidate other debts?
    5. Are you making more money?
  2. The REAL Cost of Refinancing Your Home
    1. The Twin Focus of Most Mortgage Refinances
    2. Closing Costs
  3. Ways to Refinance Your VA Loan
    1. VA Interest Rate Reduction Refinance Loan
    2. VA Cash-Out Refinance 
    3. VA Refinance Funding Fee
  4. How Much Does a VA Refinance Cost?
  5. When Can I Refinance With the VA Loan?
    1. Should I Refinance My VA Loan?
  6. Mortgage Refinance Mistakes

Should You Refinance a Mortgage?

While refinancing has many potential benefits, refinance your mortgage is not always a good idea. If you’re considering a refinance, here are a few things to consider:

Has your credit score improved?

Because your mortgage interest rate is determined partially based on your FICO credit score, if you know that your credit score has improved considerably since your mortgage loan was signed – it makes sense to consider refinancing your mortgage. The improved credit score should offer a better interest rate. The good news is that being approved for a mortgage can improve your credit score over time, as long as you make regular payments.

Are mortgage interest rates increasing?

If you currently have an adjustable-rate mortgage (ARM) and anticipate increasing interest rates, you’ll want to try and switch to a fixed-rate mortgage. When you have a fixed-rate mortgage, your interest rate will stay the same throughout the loan (unless you refinance it again later). If you already have a fixed-rate mortgage and interest rates are increasing, you probably will not want to refinance. Sometimes people refinance despite getting a higher interest rate if they need to take equity out of their home or change the term of the loan – maybe from 30 years to 15 years so that they can pay it off faster.

Click here to check Mortgage Rates in your area.

Are you having trouble making your payments each month?

If you’re struggling to make ends meet, it may be a good idea to refinance your mortgage if you can lower the interest rate or change the monthly payment amount to a lower amount. This can be done by refinancing the remaining balance on your mortgage loan to a new 30-year loan. The lower balance and a longer repayment term will reduce your monthly payments. If you qualify for a lower interest rate, you can decrease your monthly payment even more. (Read more about options for homeowners who can’t make the mortgage payments).

Do you need to consolidate other debts?

If you find your credit cards or loan payments have gotten out of control, you may decide to take some of the equity out of your home to pay off those debts. Once you have used the home’s equity to pay off debts, you’ll just have one payment for your home each month to worry about. You’ll save money on interest payments, and it makes it easier to keep track of payments.

Are you making more money?

Not all mortgage refinances are done to obtain a lower payment. Sometimes, people get a higher-paying job or get married and then have a two-income earning family. Suppose you decide to put your higher income toward paying off your mortgage sooner. In that case, you may decide to refinance the mortgage and convert it to a 15-year amortization if it was initially set up as a 30-year amortization mortgage (Compare 15 Year and 30 Year Mortgages to see which is suitable for you). You’ll save tens of thousands of dollars in interest and own your home free and clear that much sooner.

The REAL Cost of Refinancing Your Home

With mortgage interest rates at all-time lows, there’s a surge of refinancing activity as homeowners try to take advantage of the drop. For most homeowners, refinancing at these rates makes abundant sense. But there are costs involved in refinancing your home that homeowners are not always aware of. Some of them are built into the new loan package and aren’t always obvious.

This isn’t to say that you shouldn’t refinance, only that you need to be aware of certain realities to avoid them or at least minimize them. Let’s take a look at some of the benefits – and risks – of refinancing your home.

The Twin Focus of Most Mortgage Refinances

Most people refinance due to two primary factors: interest rate and monthly payment. An interest rate dropping from, say, 6% down to 3.5% is certainly attractive. So is the possibility of saving $200 or $300 per month on your house payment.

Numbers such as these are attractive to homeowners since they represent measurable benefits from the refinance. But there are certain costs involved in refinancing that have to be considered in light of the savings expected from getting a lower interest rate and monthly payment.

Closing Costs

Closing costs are the most prominent and easily measurable costs in a refinance. Closing costs are presented to the borrower at both the application and the closing in hard numbers that are easily understood. You can know, for example, that you are paying $3,000 in closing costs to lower the interest rate on your mortgage from 6% to 3.5% on a $150,000 loan.

One of the most popular ways to determine if the closing costs paid to justify doing the refinance is by dividing the amount of the closing costs by the monthly savings. This is sometimes referred to as the “recapture period”. If you divide $3,000 in closing costs, by a $200 per month reduction in your house payment, you will see that the refinance will pay for itself in just 15 months.

Most financial experts will say that the refinance is worth doing if you can recover your closing costs in 24 to 36 months. This is especially true if you plan on being in the house for five years or longer. Not only will you recover the closing costs paid within the first two or three years, but you’ll reap real savings in every year thereafter.

Ways to Refinance Your VA Loan

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 TypeFunding Fee for First VA LoanFunding 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 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.

Mortgage Refinance Mistakes

If you have a mortgage that is over a year old, chances are very good that you will be able to save money by refinancing your mortgage.  But take some time to research your options before you apply for a new loan – and make sure you avoid these mistakes!

1. Be careful not to overestimate the value of your home. Home prices still haven’t fully stabilized in some areas of the country.  You may not have as many refinancing options if you are underwater in your home, or you may need to apply for a special refinancing program, such as the Making Home Affordable program.  Lower home prices may also erase some of your equity, meaning you may need to bring extra cash to the table to avoid PMI, or you may need to take out an 80-10-10 mortgage or other financing option.

2. Don’t focus only on the interest rates.  Not all loans are created equally. Be sure to compare the offers from each lender on a term-by-term basis, keeping in mind that all lenders charge varying fees and closing costs. Compare lender fees, loan terms, and lender reputations to your decision to refinance your mortgage.

You may also be able to get a lower interest rate by buying points on your mortgage. Be sure to run the numbers.

3. Don’t use the first lender you find. There are thousands of lenders out there, but they aren’t all created equally. It’s a good idea to consider the lender’s reputation and whether or not your lender will continue to service your mortgage or sell it off to investors. Dealing with one lender over the course of your mortgage is often preferred over dealing with multiple mortgage servicers as sometimes paperwork gets lost, escrow requirements may change, etc.

Shop for the best mortgage rates. We recommend searching a variety of options before refinancing your mortgage. Some great places to shop for good mortgage rates include Quicken Loans and Lending Tree. We also have a mortgage comparison table on our site.

4. Consider all loan terms. Many borrowers are refinancing into a 30-year fixed mortgage instead of considering other options such as a 20-year or 15-year fixed rate, which would shorten the life of the loan and significantly reduce the amount paid to interest. Here are the pros and cons when comparing 15 and 30-year mortgages.

5. Consumers are uncertain of what documents are required to refinance: Borrowers who haven’t refinanced in recent years sometimes fail to have the required document going into refinancing which delays the closing process. Be sure to gather all your documentation in advance and bring it with you to the closing. This will save you a lot of time, and possibly money.

6. Inaction. The current mortgage rates are excellent, but they may or may not be around for a while. The sooner you lock in your rate, the sooner you can start saving money – and more importantly, not miss out on this opportunity.

7. Underestimating the time commitment. Refinancing your mortgage can be time intensive, depending on several factors, such as how much you owe on your home, whether or not there are multiple liens on the home, time of year, whether or not you are self-employed, and other factors. Be prepared to take a few days to compare mortgage rates, get your home appraised, and schedule the closing. The actual paperwork can take a couple of hours depending on all of the above factors. My wife and I used a VA Loan to buy our home, which has a specific process for buying and refinancing. Thankfully, refinancing with a VA Streamline Refinancewas fairly easy.

Take all of these items into account, and you can likely save a lot of money by refinancing your mortgage.

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About Ryan Guina

Ryan Guina is The Military Wallet's founder. He is a writer, small business owner, and entrepreneur. He served over six years on active duty in the USAF and is a current member of the Illinois Air National Guard.

Ryan started The Military Wallet in 2007 after separating from active duty military service and has been writing about financial, small business, and military benefits topics since then. He also writes about personal finance and investing at Cash Money Life.

Ryan uses Personal Capital to track and manage his finances. Personal Capital is a free software program that allows him to track his net worth, balance his investment portfolio, track his income and expenses, and much more. You can open a free Personal Capital account here.

Featured In: Ryan's writing has been featured in the following publications: Forbes, Military.com, US News & World Report, Yahoo Finance, Reserve & National Guard Magazine (print and online editions), Military Influencer Magazine, Cash Money Life, The Military Guide, USAA, Go Banking Rates, and many other publications.

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