Picture this: You’re a veteran, proud and grateful for the VA loan that helped you buy your home. It was a no-down-payment deal, an exclusive benefit because you served our nation. But now, times have changed, and so have interest rates.
You ask yourself – “Can you refinance a VA loan?”. A golden opportunity seems to be landing at the shores of your life, but there’s doubt clouding it. After all, navigating refinancing options can feel like finding north without a compass in uncharted territory.
Credits and equity will become crystal clear. We’re on this journey together, exploring the nuances of VA loans and how to refinance them effectively. By breaking down complex concepts like IRRRLs or cash-out refinances, lender credits, and home equity into understandable chunks – we’ll ensure you walk away with a comprehensive understanding.
Table Of Contents:
- Understanding VA Loan Refinancing Options
- The Funding Fee in VA Loan Refinancing
- Credit Qualifying vs Non-Credit Qualifying IRRRLs
- Timing and Lender Fees in VA Loan Refinancing
- The Recoupment Test
- FAQs about Can You Refinance a VA Loan
Understanding VA Loan Refinancing Options
If you’re a veteran or active military personnel, navigating the sea of home loan options can be challenging. But don’t worry; we’ve got your six. You may have heard about VA loans, but did you know they also offer refinancing options?
Replacing your existing mortgage with a new one featuring more favorable terms is what refinancing is all about. It’s like trading in an old car for a more unique model with better features – only this time, it’s your house.
What is a VA IRRRL?
The Interest Rate Reduction Refinance Loan (IRRRL), often called the VA streamline refinance, allows those with existing VA loans to lower their interest rate and monthly mortgage payment.
This option is helpful if market conditions have improved since you first took out your loan. Imagine buying an expensive jacket on sale at half price – the same quality product but less costly.
You’ll need to remember two key things: First, only those who already hold va-backed mortgages are eligible for this refinance loan; secondly, using the IRRRL means staying put in the property financed by your original va-backed loan.
Cash-Out Refinancing Explained
Sometimes, life throws curveballs that require extra cash—unexpected medical bills, or major home repairs are examples. This is where cash-out refinancing enters into play.
A VA cash-out refinance lets you take out a new loan for more than what you owe on your current mortgage. The difference between the two amounts is then given to you in cash. It’s like selling an old baseball card collection, using the money to buy newer cards, and pocketing any leftover change.
This option allows veterans to refinance their home loans. With a VA-backed cash-out refinance, they can convert some of their home equity into cash.
The Funding Fee in VA Loan Refinancing
When you refinance a VA loan, one cost often catches borrowers off guard – the funding fee. The Department of Veterans Affairs receives a percentage of the loan amount from non-exempt borrowers as funding fee.
This fee, usually 0.5% for non-exempt borrowers, helps offset costs associated with administering this benefit program. But what if I told you some people are exempt from paying this fee? Intrigued?
Exemptions From The Funding Fee
You might wonder who qualifies for an exemption from the VA funding fee when refinancing their loans. Ah, here’s the exciting part.
If you’re receiving service-connected disability compensation or would be entitled to compensation if not for retirement pay, then voila. You’re exempt. Surviving spouses of veterans who died in service or from service-related disabilities also join the lucky bunch. No more fretting about those extra bucks on your loan balance.
Funding Fee Rates And Their Variations
The rate isn’t always set at 0.5%. It can change depending on several factors, including type of veteran, nature of prior usage, and type of transaction (purchase vs refinance). It’s like buying shoes; prices vary based on brand, style, and size.
In most cases, though—like with Interest Rate Reduction Refinance Loans (IRRRLs)—it remains constant at 0.5%, but other transactions could attract higher rates.Want proof? Check out this Funding Fee Table provided by the VA.
Paying The Funding Fee – Upfront Or Roll It Into Your Loan?
Great news. You’ve got choices for handling your funding fee. Either pay it upfront or add it to your loan balance. The idea of rolling the cost into your loan could be appealing, thinking—“Why not put off paying and live a little?” correct?
Credit Qualifying vs Non-Credit Qualifying IRRRLs
Regarding VA loan refinancing, there are two primary types of Interest Rate Reduction Refinance Loans (IRRRL) – credit qualifying and non-credit qualifying. Comprehending the variations between these two types of IRRRLs can assist you in making an educated decision.
Understanding Credit Qualifying IRRRLs
A credit-qualifying IRRRL involves a review of your credit score. This means lenders will look at your minimum credit as part of their assessment. Don’t be alarmed – the VA guidelines are usually more lenient than conventional loans, so you may still qualify even if your score isn’t perfect. Even if your score isn’t perfect, the VA guidelines are more lenient than conventional loans.
This type requires slightly more documentation compared to its counterpart. Lenders typically ask for information about income and assets during the application process, which is used in determining whether you’re capable of handling an existing loan refinance.
Diving Into Non-Credit Qualifying IRRRLs
The non-credit qualifying option offers a streamlined path for veterans seeking to lower their interest rates or change from an adjustable-rate mortgage (ARM) to a fixed one without delving into extensive financial scrutiny.
You’ll love how quick and straightforward this method is. As per data collected by USMilitary.com, we’ve found that most veterans prefer this route because they do not need extensive paperwork – just proof that they have been making regular payments on their current VA loan.
How Does Loan Forbearance Affect Your Options?
Loan forbearance can impact your eligibility for VA IRRRL. If you’ve recently been in forbearance, the guidelines may change slightly. You might be required to make up three consecutive payments before being considered eligible.
Remember, this info is important if you’ve used any COVID-19-related loan relief options.
Timing and Lender Fees in VA Loan Refinancing
If you’re considering a VA Interest Rate Reduction Refinance Loan (IRRRL), it’s essential to understand the timing and lender fees involved. But don’t worry, we’ve got your six.
Firstly, patience is key when planning for an IRRRL. You must wait at least 210 days from your first payment due date or after making six monthly payments on your current VA loan before initiating an IRRRL.
This might seem like a long time, but consider this – while waiting, you can review your finances and ensure that refinancing truly fits into your financial plan.
The Role of Lender Fees
Lenders play a significant role in the VA refinance process. They provide loans, yes, but they also set their rates for these loans.
In other words, each lender has different fees for getting an IRRRL. Some may charge points or additional fees, whereas others may waive them entirely. So make sure to shop around among VA lenders to find the best deal possible – it could save you some serious cash.
Navigating Closing Costs
Closing costs are another aspect of refinancing that should be considered during this process, as they vary based on location and loan amount.
- A tip: Check out resources like the Consumer Financial Protection Bureau’s Your Home Loan Toolkit. It provides valuable information about how to understand and calculate closing costs.
Is it Worth the Wait?
The question you might be asking is, “Is this refinance process worth my time?”
To answer that, consider your current financial situation. If it’s feasible to lessen your mortgage payment or switch from an adjustable-rate loan to a fixed-rate one, then maybe 210 days of waiting is worth it.
- Here’s a tip: Think about talking to a financial advisor. They can give you tailored advice based on your unique situation.
The Recoupment Test
When considering a VA loan refinance, one crucial aspect to understand is the “Recoupment Test.” This test checks whether your monthly savings from lower mortgage payments will cover the refinancing closing costs within 36 months. It’s crucial in determining if a refinance makes financial sense for you.
Let me illustrate this calculation with an example to make it easier. Let’s say your current VA mortgage payment is $1,200 per month, and after refinancing through an Interest Rate Reduction Refinance Loan (IRRRL), it drops to $1,100. That means each month, you are saving $100.
Now imagine that your closing costs for this IRRRL were around $3,000 – how long would it take to recover these costs? If we divide the total cost by monthly savings ($3,000/$100), we get 30 months, which fits nicely under the limit of 36 months specified by Consumer Financial Protection Bureau guidelines. Therefore, passing our recoupment test.
Cash-Out Refinances and The Recoupment Rule
But what about cash-out refinance loans? They also come into play when discussing recouping investment on refinanced mortgages. In contrast to IRRRLs where rates tend to be lower, resulting in smaller monthly payments, cash-out refis may not always offer a substantial reduction in interest rate or overall payment.
A Veteran can use their home equity through a VA-backed Cash-Out Refi, but they must bear in mind that while getting hands-on some much-needed money now might feel great – over time, the added interest could increase their monthly mortgage payments. This means the recoupment test could be more challenging to pass for cash-out refis than an IRRRL.
High-Cost Counties and Loan Limits
loan limits don’t automatically mean you’re getting a better deal. It’s critical to assess your fiscal circumstances and weigh all possibilities before deciding.
FAQs about Can You Refinance a VA Loan
Is it a good idea to refinance a VA loan?
Yes, refinancing can be a wise decision if you’re looking for lower interest rates or want to convert home equity into cash. However, it’s important to weigh the costs before making a decision.
How soon can a VA loan be refinanced?
You must wait 210 days from your first payment date or after six monthly payments before initiating an IRRRL (Interest Rate Reduction Refinance Loan).
How much does it cost to refinance a VA loan?
The cost of refinancing a VA loan varies depending on the lender and the refinance. Expect to pay fees such as the funding fee, closing costs, and potential points.
Is refinancing a VA loan free?
No, refinancing a VA loan is not free. There are usually expenses involved, such as the funding fee, appraisal charges, and other closing costs associated with refinancing your mortgage.
Now you know the answer to your question, “Can you refinance a VA loan?” Absolutely! The door is open for an Interest Rate Reduction Refinance Loan (IRRRL) and cash-out refinancing.
Remember that funding fee? It’s a small price for big savings. However, some veterans might be exempt from it.
Credit qualifying or non-credit qualifying IRRRLs – choose what fits best with your financial profile. But remember, those in forbearance may need to meet additional guidelines.
Timing matters as well. Waiting periods apply before initiating a VA IRRRL while lender fees vary significantly.
In short, explore all options thoroughly before deciding because the right choice could make a world of difference!
Want more military info? Find your nearest military recruiter here!