Deciding whether to refinance isn’t quite the emotional decision that purchasing a home can be. This is much more about whether the numbers make good financial sense.
But it isn’t always easy for Veteran homeowners to know when the time is right. Talking with a lender you trust is essential when it comes to evaluating mortgage offers and assessing what’s in your best interests.
There are also some steps you can take to dig a bit deeper.
Here’s a look at five signs a VA refinance might make sense.
Lowering your mortgage payment even just a little every month can be helpful, but the VA’s primary refinance option – the Interest Rate Reduction Refinance Loan (IRRRL) – features rate reduction requirements. The IRRRL is open only to Veterans with VA mortgages.
If your current VA loan has a fixed interest rate, the new loan rate would need to be at least 50 basis points lower. One basis point is equal to 1 percent of the loan. For example, if your current fixed rate was 3.5 percent, the refinance rate would need to be at least 3 percent.
If you’re moving from a fixed-rate VA loan to an adjustable-rate one, the new rate would need to be at least 200 basis points lower.
VA homeowners moving from an adjustable-rate mortgage (ARM) to a fixed-rate loan don’t need to meet a rate requirement.
The same is true for Veterans using the VA Cash-Out refinance option.
Most VA refinances will come with closing costs. Part of the consideration for homeowners is deciding whether the refinance savings will ultimately outweigh the cost. A big part of that is how long you plan to live in the home.
The way to get at this is to compare the total costs of refinancing to how much money it’ll save you each month. For example, let’s say a refinance will cost you $3,600 and cut your monthly payment by $100.
When you divide the cost by the savings, you get the number of months it takes to recoup the refinance expense. For this example, the Veteran recoups the cost in 36 months (3,600/100).
The VA requires recoupment within 36 months for IRRRLs. Lenders don’t count expenses like escrows for property taxes or homeowners insurance when calculating recoupment. There’s less emphasis on recoupment for most Cash-Out loans.
Every homeowner’s situation is different, but if you’re likely to move before you recoup the costs of a refinance, you might take a step back to consider whether it’s a good investment.
Adjustable-rate mortgages aren’t bad or inherently problematic, but they’re definitely not for everyone. One of the challenges with ARMs is that you can’t bank of payment certainty, because your interest rate is eventually subject to change.
Shifting from an ARM to a fixed-rate mortgage usually means your monthly housing costs increase, because introductory ARM rates are typically lower than fixed rates. But many Veterans trade that for the security of having the same principal and interest payment for the life of their loan.
Plus, VA homeowners have access to some stellar fixed interest rates, especially in the current rate environment.
You’ll need to have been settled into your current mortgage for a minimum amount of time before you can close on a VA refinance.
At a minimum, the refinance must close at least 210 days after the first payment due date of the loan being refinanced, and the Veteran must have made at least six monthly payments. Lenders can add their own seasoning guidelines on top of those VA requirements.
Refinances don’t always save you money in the short term. In fact, moving from a 30-year term to a 20- or 15-year typically means you’ll pay more every month toward principal and interest.
But shrinking your loan term can save a ton of interest over the life of the loan. The key here is making sure you can afford that higher monthly mortgage payment. Veterans can also consider whether it makes more sense to pay an additional amount toward their principal balance every month or year instead of refinancing into a shorter loan term.
Again, every VA homeowner’s situation is different. Costs, fees, interest rates, guidelines and more can all vary by lender.
Veteran homeowners tend to get many unsolicited refinance offers, and many of them are too good to be true. Talk with a Veterans United VA Loan Expert if you’re wondering whether a refinance might be a smart investment.