When Should You Refinance a VA Loan?
Refinancing a VA home loan may be a good option for veterans, service members, and their families who want to reduce or stabilize their monthly mortgage payments or tap into their home equity.
- Refinancing a VA home loan allows veterans, service members, and their families to replace their current loan with a new one under different terms.
- A successful loan refinance can result in lower mortgage payments, lower interest rates, or liquid cash taken from your home’s equity.
- Though refinancing a VA home loan can be beneficial, it’s important to evaluate your financial situation and whether the benefits of refinancing would outweigh the closing costs before making a decision.
VA loan refinancing allows veterans, service members, and their families to replace their current home loan with a new one under different terms. This can be an effective way to save money, reduce monthly payments, or leverage your home equity. Though there is a common misconception that VA home loans take too long or are too complicated to be worth refinancing, the process can be streamlined and beneficial when done at the right time.
Understanding VA Home Loan Refinancing
The U.S. Department of Veterans Affairs offers the VA home loan program to help veterans, service members, and their families buy, build, or improve a home or refinance their current home loan. Under the program, private lenders, such as banks, mortgage companies, and credit unions, finance the loan, while the VA guarantees a portion of the loan amount.
Refinancing allows you to replace your current loan with a new one that has different terms. The VA offers multiple types of refinance loans for various situations. The advantages of refinancing a VA home loan include no private mortgage insurance requirement, no down payments, and the potential to roll your VA funding fee into your loan amount and pay it off over time.
When Refinancing Makes Sense
When VA loan rates fall below your current interest rate, refinancing could lower your monthly payment and reduce the total interest you’ll pay over the life of the loan. Refinancing also makes sense if you’re shortening your loan term or you currently have an adjustable-rate mortgage. Additionally, if you need extra liquid cash to use for debts, school costs, or other important expenses, refinancing your home loan can allow you to tap into your home’s equity.
Key Considerations Before Refinancing
Veterans, service members, and their families should consider several key factors before deciding whether to refinance their VA home loans. These include interest rates, loan terms, and recoupment periods.
Interest Rates
Typically, it makes sense to refinance your VA loan when interest rates drop by 0.5% to 1% below your current rate. Refinancing into a lower interest rate can have long-term financial benefits, especially if it reduces your monthly payment.
Loan Term
Refinancing into a shorter loan term versus a longer term can impact your monthly payments and overall loan costs. While a shorter loan term can result in lower interest payments, it may increase monthly payments. Consider how this will affect your budget.
Recoupment Period
When refinancing your home loan, the “recoupment period” refers to the break-even point at which your savings equal the money you spent on closing costs. For government-backed loans, such as VA loans, the required recoupment period is typically within 36 months. If you plan to move to a new home before reaching the recoupment period for your loan, refinancing may not be the best financial decision.
Types of VA Loan Refinances
There are several different types of VA refinance loans, including the Interest Rate Reduction Refinance Loan, or IRRRL, and the VA Cash-Out Refinance Loan. Each loan type has differing benefits.
Interest Rate Reduction Refinance Loan, or IRRRL
An Interest Rate Reduction Refinance Loan, or IRRRL, is a VA home loan used primarily for refinancing existing VA loans to lower the interest rate or switch from an adjustable-rate mortgage to a fixed-rate loan. If you have an existing VA-backed home loan and want to reduce or stabilize your monthly mortgage payments, an IRRRL may be right for you.
You may be eligible for an IRRRL if you already have a VA-backed home loan, you’re using the IRRRL to refinance it, and you can certify that you currently live in or used to live in the home covered by the loan.
Additionally, to qualify for an IRRRL, you must meet certain “seasoning” requirements: it must be at least 210 days from your first mortgage payment, and you must have made at least six months of consecutive payments.
VA Cash-Out Refinance
A VA Cash-Out Refinance enables veterans to tap into their home equity, allowing them to use the funds for home improvements, debt repayment, or other financial objectives. This type of refinance can be a good option for those who need cash for a large expense, wish to refinance from a non-VA loan, or will use the funds for debt consolidation.
You may be eligible for a VA Cash-Out Refinance if you qualify for a VA-backed home loan Certificate of Eligibility, you meet the VA’s and your lender’s standards for credit and income, and you’ll live in the home you’re refinancing. Additionally, the loan seasoning requirements for a cash-out refinance are generally more flexible than for an IRRRL.
VA Home Loan Refinancing Considerations for Specific Situations
There is no one-size-fits-all approach to refinancing a VA home loan, and every veteran, service member, or family’s individual situation can dictate a different approach to refinancing—particularly the type of loan they currently have or are refinancing into. Here are some specific refinancing scenarios:
- Switching From an ARM to a Fixed-Rate Loan: Veterans with an adjustable-rate mortgage, or ARM, may want to refinance into a fixed-rate VA loan to avoid the risk of rising interest rates and unpredictable payments.
- Using a VA Cash-Out Loan for Debt Consolidation or Home Improvements: Refinancing with a VA Cash-Out loan can be beneficial for veterans who want to access cash for major expenses or consolidate high-interest debt.
- Avoiding Mortgage Insurance: VA loans do not require mortgage insurance, unlike FHA or conventional loans. Refinancing from an FHA loan or conventional loan into a VA loan can help remove private mortgage insurance, or PMI, or mortgage insurance premiums, or MIP, further lowering monthly payments.
When Shouldn’t You Refinance Your VA Loan?
There are several scenarios in which a person may want to hold off on refinancing their VA home loan. Generally, your savings from a refinance should outweigh the closing costs within 36 months to make it worthwhile to pursue. Additionally, you may want to hold off on refinancing if:
- You plan to move soon.
- Interest rates have not dropped significantly.
- There will be high closing costs.
Ready to Refinance Your VA Home Loan?
Veterans, service members, and their families may want to consider refinancing their VA home loans to achieve lower interest rates, reduced payments, or cash-out options. However, it’s not always the right move. If you plan to move to a new home within the next few years or if the rate change is so small that it won’t outweigh your closing costs, it may be best to continue with your current loan for now.
Veterans considering refinancing should consult their VA lender to evaluate their specific situation and determine the best option to achieve their financial goals.
