Military life isn't always easy, so when active-duty members and veterans have the opportunity to take advantage of service-related perks, those perks are at least worth looking into, right? Especially if it means saving money.
You probably already know that VA loans make buying a home a little easier and more affordable. But did you know that the Department of Veterans Affairs also offers refinancing options for home loans? There are two programs, and each could potentially save you thousands of dollars over the life of the loan with just a half percent reduction in your rates.
VA loan refinancing isn't a task you can take on alone, however. You'll need to work with an experienced lender who knows the many ins and outs of working with the VA. Everyone's finances are different, so it's essential to discuss the pros and cons of VA loan financing and understand how they relate to your specific financial situation.
If you've been thinking of refinancing your home loan, these brief descriptions will give you the background information needed to help you discuss your options with lenders.
1. VA IRRRL, aka 'Streamline' Refinance
The VA Interest Rate Reduction Refinance Loan (IRRRL), also known as the "streamline" refinance loan, is available to borrowers who currently have a VA loan and want to reduce their mortgage payments, lower their interest rates or convert from an adjustable-rate VA loan to a fixed-rate loan.
Since you're moving between VA loan products, veterans like this refinance option because it usually has less paperwork and lower closing costs than other options. Other perks include rolling closing costs into the overall loan and the possibility of completing the refinance without an appraisal or credit underwriting.
If you're interested in an IRRRL, your loan officer will discuss specific requirements regarding your current loan, employment and credit score. These guidelines vary by lender.
Other information they'll share:
- You don't need additional VA loan entitlement to apply. Your original VA loan entitlement applies to the IRRRL, regardless of the loan amount.
- Most often, the original VA loan borrower must be on the new IRRRL. Death or divorce of the applicants are the exceptions.
- You must have lived in or currently live in the property, but it doesn't have to be your primary home.
- Closing costs and funding fees typically range from 3%-5% of the loan amount but can be rolled into the loan.
- You can use an IRRRL to refinance a 30-year mortgage to a 15-year mortgage.
- The new-loan term date is maxed out by the original VA loan plus 10 years, but not exceeding 30 years and 32 days.
2. VA Cash-Out Refinance Loan
The VA gives veteran borrowers, even those with conventional loans, access to their home's equity with a cash-out refinance loan. The cash-out option replaces your original VA loan, and you'll sign for a new loan with a new mortgage rate and payment. Unlike the IRRRL, borrowers need additional VA loan entitlement to apply. Another major difference from the IRRRL is that you cannot add closing costs, including the VA funding fee, to the loan. You'll pay up-front, usually by using some of the newly cashed-out equity.
If a cash-out loan sounds as though it could work for you, know that lenders will review your credit score, debt-to-income ratio, income and employment status to make sure you meet their requirements. Other factors to consider include:
- Most lenders have guidelines you'll need to meet about how long it will take to recoup fees and costs related to a cash-out refinance.
- You must intend to make the property your primary residence.
- Lenders often mandate a seasoning period on your current mortgage, usually about six months, before you can apply for a cash-out loan.
- With a cash-out loan, you have the option to leave your equity untouched and only refinance to a lower interest rate.
An IRRRL or cash-out loan could be a feasible solution if you want to clear debts, but not all borrowers will benefit. It depends on your specific financial situation. You can run the numbers on your own to get an idea whether they're worth investigating, but you need an experienced lender to help you decide if these loans will ultimately work in your favor.
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