One of the most popular military benefits is the VA Loan, which makes home ownership more easily attainable for thousands of veterans. Sometimes you can lower your monthly VA Loan payment by refinancing it at a lower interest rate, or by changing from an adjustable rate VA Loan to a fixed rate loan. Whatever the reason for refinancing your VA Loan, you should consider the pros and cons as they apply to your situation.
Benefits of a VA Loan Refinance
If your VA Loan is an Adjustable Rate Mortgage (ARM), you probably find that the interest rate tends to increase rather than decrease, which causes your monthly payment to increase. It’s not unusual for homeowners with ARM loan payments to find themselves paying more than the current fixed mortgage rates. In this case, you will probably benefit greatly by refinancing your mortgage to get a lower, fixed interest rate.
If you have a first and second mortgage, refinancing into a single mortgage might help you consolidate your monthly bills to help you save money and make bill paying easier.
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 is probably worth the time and effort. If you refinance for the same number of years you’ll extend your payment date, but end up with a lower monthly payment. You can pay more than the monthly payment in order to reduce the number of years you owe on your home.
Disadvantages of a VA Loan Refinance
Refinancing a VA Loan usually involves fees, though in some cases you can roll the costs of the refinance into the new loan instead of paying anything out of pocket (you can do this with a VA Streamline refinance). Be sure to evaluate how the fees will affect your monthly payment and determine if it is worth your effort. If you know you will be moving within a few years it may not make sense to refinance because you won’t have time to recoup any savings.
Refinancing may cause you to pay more years on your mortgage. For example, if you had only 15 years left on your 30 year mortgage, you may need to refinance for another 30 year term, which causes you an additional 15 years of payments. The only time this would make sense is if you could no longer afford your current payment and extending the loan for an additional 15 years will help prevent a foreclosure. Just keep in mind that if you do this, you will be paying thousands more in interest payments in the long run. Extending the duration of your loan should be a last resort.
Alternatively, sometimes a mortgage refinance will be a shorter period of time, which can increase your monthly payment drastically. Here is an example of refinancing a 30 year VA Loan into a 15 year loan.
If you are refinancing a mortgage in order to cash out your home equity (and use the money for home repairs, vacation, or something else) keep in mind that if home prices should drop you will owe more than the value of the home. This is a problem if you try to sell your home before home values increase, again.
Run the numbers and apply them to your personal situation
In some cases, refinancing a VA Loan can save you hundreds of dollars each month, allowing you to quickly recoup the associated costs of refinancing your VA Loan. Additionally, refinancing into a fixed rate loan from an ARM can give you stability and certainty regarding your monthly VA Loan payment. In other cases, you may not save much with a refinance, and it may end up costing too much to be worth your time. Your best bet is to sit down and run the numbers based on how much you will save, how long you will live in the house, and any other relevant information.