VA Loan Refinance Options That You Need to Know
A refinance can help you cut down on your monthly payments and save thousands of dollars in interest payments in the long run.
Before you start looking into the various VA loan refinance options, it's essential to understand what they are and how they can help you before deciding which option is best suited to your needs. This article will discuss the primary VA loan refinance options you should be aware of. Understanding these options will help you secure a loan refinance with better rates, lower fees, and flexible payment plans! So read on to learn more!
VA Refinance Options
The Department of Veterans Affairs (VA) offers low-interest home loans to U.S. military veterans, active armed forces members, and surviving spouses. On the other hand, these VA loans offer the best options in the market for loan refinancing. You can enjoy lower interest rates and shorter repayment terms when refinancing your existing VA home loan.
There are two ways to benefit from refinancing your loan: Interest Rate Reduction Refinancing Loan (IRRRL) or a VA Streamline and Cash-Out Refinancing. What do all these two refinancing options have in common? They all relate to refinancing a VA loan with a lower interest rate.
For borrowers ready to take their home to new heights, these loans can help you get back into your home faster, with cash in hand. Both of them come with a different set of perks, so it's best to know more about them before deciding what kind of refinance you want to get. Of course, there's no one-size-fits-all option for every borrower.
The most important thing is understanding why you want to refinance your loan. The most obvious reason is that the interest rates have dropped, and you're looking to save some cash on that particular monthly mortgage payment. Other considerations include:
You have improved your credit profile, and your FICO makes you eligible for a better rate.
You took a new job or got a promotion, and your monthly household income is higher enough to let you convert a 30-year mortgage into a 15-year mortgage.
Maybe in an unexpected circumstance, you need to adjust to a smaller income level.
Maybe you need to make home improvements or repay some revolving debts and capitalize on the equity built up in your home.
- You don’t want to worry about your ARM and need to refinance into a fixed-rate mortgage.
It's also essential to note that if you have a conventional loan, you can refinance into a VA loan. With that in mind, let's take a quick look at each VA loan refinancing option!
Interest Rate Reduction Refinancing Loan or VA Streamline
The Interest Rate Reduction Refinancing Loan, or IRRRL for short, was created to let veterans refinance their primary home loan with a lower interest rate. Mortgage experts pronounce IRRRL as Earl. It helps you reduce your mortgage payments. With an IRRRL, you can lower your closing costs, shorten your loan term, or combine all three. This type of refinancing is also referred to as VA streamline because it's designed to take out only a few items from your financial history and use them as proof of income and previous occupancy.
There are no points and fees; it's pretty much a one-size-fits-all plan, and no appraisal or credit score benchmark is required. Eligibility requirements vary depending on the lender and your particular situation. Proof of the previous occupancy is all you need for a VA streamline when it comes to occupancy. This means you can look to refinance a mortgaged home you no longer occupy. Additionally, you must have been paying your current loan for the last six months before applying for a VA streamline.
Important note: If you seek an IRRRL, you'll have to pay the VA funding fee, which is just a half (0.5%) of the loan amount. However, if you're a surviving spouse, veteran, and service member receiving compensation for a service-related disability, you won’t pay the VA funding fee.
VA Cash-Out Refinancing
With a VA cash-out refinance, you can cash out on some of the equity in your home. This may be an option if you want to free up some extra money or have improved your credit score from when you first purchased your home. With a cash-out refinance, you take out a loan for more than what's owed on your current mortgage, and that amount is then sent to your lender.
Cash-out refinancing is a good idea if you're going to be taking on a sizable debt, such as getting a bigger mortgage or making improvements to your home. In that case, borrowing more money might make sense. However, if you're not planning on using that money for something specific, cash-out refinancing could hurt your situation. The interest rate will be a little bit higher than with other loans, and you may find yourself with no cash leftover once you account for closing costs and fees.
VA Streamline vs. Cash-out Refinancing
Understanding these two types of loans is an essential first step when deciding which refinancing is right for you. The following table will help you understand each option in deep detail.
|Purpose||You can refinance your existing VA loan from an adjustable-rate mortgage (ARM) or a lower interest rate.||You can pay off any liens. Can also provide you with some cash|
|Interest Rate||The rate should be lower than on your existing VA loan (unless the existing loan is an ARM)||Any negotiated rate|
|Monthly Payment||Payment must be lower than that on your existing VA loan unless: Your ARM is being refinanced, A term is shortened, Energy efficiency improvements are included||No requirement|
|Discount Points||Reasonable points can be Paid. Only two of these points can be included in the loan amount||Valid points can be paid from the loan proceeds|
|Maximum Loan||Your existing VA loan balance, plus allowable fees and charges, plus about two discount points, adding the cost of any energy efficiency improvements, plus the VA Funding Fee||100% of the reasonable value of your property indicated on the NOV, plus the cost of any energy efficiency improvements, plus the VA Funding Fee|
|Entitlement||You can reuse the entitlement used on your existing VA loan||Must have sufficient available entitlement; if existing VA loan on the same property is being refinanced, entitlement can be restored for the refinance|
|Fees in the Loan||Allowable costs may be included in the loan||Allowable fees and charges and points may be paid from the loan proceeds|
|Cash to Borrower||Not permitted||You can receive cash for any purposes acceptable to the lender|
|Appraisal||Not required||Appraisal is required|
|Credit||No credit score benchmark required||It’s required|
|Underwriting||It’s required except in particular cases||Underwriting is required|
|Occupancy||You must show your previous occupancy||You must intend to occupy|
VA loans are military-specific mortgages that offer flexible qualification requirements and lower rates than standard mortgages. One of the great benefits of VA home loans is the ability to refinance your existing loan, lowering your monthly payments and saving you money over time. If you have a VA loan and want to refinance it, you should understand what options you have for refinancing your loan and how you can use them to your advantage.