A VA loan makes it easier for veterans to buy homes. These loans have competitive rates and do not have private mortgage insurance even if you put no money down. However, some homeowners eventually want to refinance their mortgages to reduce their monthly expenses or tap into home equity. This guide will unveil how VA loan refinancing works, along with the pros and cons, so you can decide if it’s right for you.
What is a VA Loan?
A VA loan is a mortgage offered by the Department of Veterans Affairs. This financial product makes homes more accessible to veterans, service members, and their families. The maximum VA loan term length is 30 years. It’s common to find lenders that offer VA loans that range from 10-30 years in five-year increments.
Brief Overview of the Refinancing Process
During the refinancing process, a lender will review your credit score, debt-to-income ratio, and other details. You will have to apply for several loans and compare rates and terms to determine the best deal.
Qualifying homeowners can choose from two refinancing options: VA Streamline (IRRRL) refinance and cash-out refinance. The former financial product reduces monthly payments, while the cash-out refinance lets you tap into home equity.
Can You Refinance a VA Loan?
You can refinance a VA loan. Homeowners have several options and can secure lower monthly payments in the process. You will have to pay for a home appraisal before getting a refinance. Borrowers must demonstrate that they fulfill the service requirements and fulfill other requirements that the lender will outline.
What are the Benefits of Refinancing a VA Loan?
Refinancing a VA loan offers several benefits. These are some of the top perks to keep in mind:
- Secure lower monthly payments: Homeowners can refinance their VA loans to secure lower interest rates or extend their term length to reduce monthly payments. Housing is the largest expense for most people, and trimming this cost can free up a lot of room in the monthly budget.
- Tap into equity: Some people use VA loans to access the equity they have built in their homes. Homeowners build equity when they make monthly mortgage payments and when the property gains value. Any down payment during the purchase also increases equity. You can use this position to cover emergency expenses, vacations, and other costs.
- Pay off your loan faster: Some homeowners with VA loans want to get out of debt sooner. These individuals may opt for a shorter term and trim a few years from their new loan.
- Change the type of rate: Switching from an adjustable-rate mortgage to a fixed-rate mortgage will make your monthly payments more predictable.
Potential Drawbacks of Refinancing a VA Loan
Although refinancing a VA loan can offer several advantages, most financial products come with some downsides. These are some of the drawbacks to keep in mind before starting the refinancing process.
- You can stay in debt longer: Extending your loan’s term will ensure that monthly mortgage payments stay in your budget longer. Keeping monthly mortgage payments where they are can get you out of debt sooner instead of pushing them further back.
- Closing costs: VA loans are better than most mortgages with closing costs, but you will still have to contend with them. Closing costs are equal to a percentage of the new loan’s balance, making it unfavorable for people who initiate refinances. You might be able to save on closing costs with a home equity loan or a HELOC.
- You may have less equity: A cash-out refinance will reduce the amount of equity you have in your home. You can only become debt-free on your property once you have 100% equity, so a refinance can put you in the wrong direction.
- Monthly mortgage payments can go up: This scenario only applies to people who get stuck with a higher interest rate, initiate a cash-out refinance, or want to pay off their VA loans sooner. A higher monthly mortgage payment will take up more space in your monthly budget. You should assess how much you can afford before initiating a refinance.
Types of VA Refinance Loans
Homeowners with VA loans can choose from two types of refinances. Here’s what you need to know about each one.
VA Interest Rate Reduction Refinance Loan (IRRRL) Streamline
This financial product allows homeowners to get a lower interest rate on their current VA loan. You can only get this type of refinance if the new loan has a lower rate than your current one. Homeowners can also choose whether they want an adjustable rate or a fixed rate. They can keep the same type of rate with a refinance or change it for a new loan.
VA Cash-Out Refinance Loan
A VA cash-out refinance allows homeowners to tap into the equity they have built over time. You can adjust the term length to minimize monthly payments. This option is optimal if you want to access home equity but do not want to take out a second mortgage like a home equity loan or a HELOC.
Comparison between VA IRRRL and VA Cash-Out
VA IRRRL refinances allow you to roll refinancing fees into the new loan. You can also use this financial product even if the property is not your primary residence. It’s possible to get this type of loan without fulfilling a minimum credit score requirement. You need an existing VA loan to use a VA IRRRL refinance.
A VA cash-out refinance can be used for a VA loan or a conventional mortgage. You can only use this loan for a primary residence and must pay the closing costs upfront. Homeowners can use the newly accessed equity to pay these fees. Lenders offering VA cash-out refinances will scrutinize your credit score and income in more detail and have minimum requirements for each one. If you get a cash-out refinance, you must pay for an appraisal, while it’s not always required for a VA IRRRL refinance.
How Can You Qualify for a VA Loan Refinance?
Here’s what you need to qualify for a VA loan refinance.
Service Requirements
Homeowners must have served in the military, be active-duty service members, or be the spouse of a veteran or current service member. Widows of veterans who died in combat or from an injury incurred during service must be unmarried when they apply for a refinance.
Credit score
A 620 FICO score will make most VA loans accessible. Some lenders have lower credit score requirements, but it’s best to be on the high end to ensure you get the most competitive rates and terms.
Debt-to-income Ratio
It’s possible to get a VA refinance if you have a 50% debt-to-income ratio. However, most lenders will want to see a 41% DTI ratio or lower.
Other Requirements
Lenders can impose additional requirements for VA loans. You should check with a lender to see what parameters you must fulfill to receive financing. Some lenders are more generous than others with their additional requirements.
The Process of Refinancing Your VA Loan
These are the steps you can expect to go through when you refinance your VA loan.
Documentation Required
You will need the same documents for any refinance: your ID, Social Security Number, address, proof of income, and others. Lenders will outline which documents you need during the application process. However, VA refinances also require that you have a Certificate of Eligibility (COE). This certificate demonstrates that you have served in the military and qualify for a VA loan. You can fill out a Request for a Certificate of Eligibility form to request a COE by mail. You can also sign up at VA.gov to download your COE if you already have it.
VA Loan Refinance Rates
It is a good idea to apply for several VA refinance loans. Comparing rates and terms can help you decide which loan is optimal for your short-term needs and long-term goals.
Step-by-Step Guide
These are the necessary steps to refinance a VA loan:
- Step 1: Determine how much you need
- Step 2: Gather the required documents
- Step 3: Apply for VA loans (an appraisal may be necessary)
- Step 4: Compare rates and terms
- Step 5: Close on a new VA loan
What Fees or Costs Are Associated with Refinancing a VA Loan?
Each VA refinance has closing costs that are normal for other mortgages, but they also have funding fees. IRRRL loans tend to have lower closing costs than VA cash-out refinances. Closing costs include appraisals, title fees, and other expenses incurred along the process. These loans do not require mortgage insurance premiums. VA loans have smaller origination fees, certain non-allowable fees, and a VA funding fee to support the program.
Is a VA Loan Refinance Right for You?
A VA loan refinance can strengthen your finances by reducing your monthly payments and letting you tap into home equity. However, this same financial product can enable bad financial habits and keep you in debt for a prolonged period of time. VA loan refinances have plenty of potential, but the pros and cons are amplified based on your financial situation and how you use the loan.
If you currently have a VA loan, you may be wondering if a VA loan refinance is the right choice for you. The Federal Savings Bank can help you determine if refinancing your current VA loan could benefit you. Whether you want to lower your interest rate, shorten your loan term, or access cash from your home equity, a VA loan refinance could be a smart financial move. Let The Federal Savings Bank assist you in exploring your options and making an informed decision. Visit their website today to learn more about VA loan refinancing and start the process of potentially saving money on your mortgage.
Frequently Asked Questions About VA Loan Refinancing
Refinancing your VA loan can make sense if you need to tap into home equity, want to reduce your monthly payments, or lower interest rates become available.
Individuals with COEs, sufficient FICO scores, and debt-to-income ratios can qualify for a VA loan refinance. You have to fulfill a lender’s requirements to receive financing.
VA loan closing costs include the appraisal, title fees, and other expenses. These closing costs range from 1% to 6% of the loan’s balance.
