Many borrowers ponder whether to use VA home loan benefits to refinance in today’s market. Refinancing a mortgage can often make sense. Many good reasons to refinance a home loan do exist. A handy checklist may help military members come to a decision about refinancing with a VA loan. By answering yes to one or more of the following, a VA-eligible borrower may want to consider refinancing:
- - Can a VA refinance be used to obtain a lower interest rate?
- - Is the cost to use VA loan benefits justified with lower monthly payments?
- - Can VA refinancing help build equity faster?
- - Can a VA cash-out refinance provide money out of equity for needs?
- - Can private mortgage insurance be eliminated with a VA refinance loan?
- - Can the VA Streamline program be used for quick and easy refinancing?
- - Can the risks of an ARM be eliminated with a fixed VA mortgage?
Those who are thinking about refinancing with a VA home loan should first figure out what it is they wish to accomplish. Top on many wish lists are lower monthly mortgage payments. Financing the same balance at a lower interest rate will typically result in lower monthly payments. Smart borrowers will calculate the “break-even” point before going ahead with the refinance process. Break-even is the point at which lower monthly payments justify the costs to refinance. Costs can include origination fee, rate reduction points (if needed), appraisal, VA funding fee and closing costs. If the total refinancing costs are $6,000 and the VA refinance saves $300 per month in payments, then a break-even calculation might look like this:
$6,000 ÷ $300 = 20 months to break even
Refinancing for lower monthly payments is not always the ultimate goal for some borrowers. Building equity faster or owning their homes outright sooner may be high priorities for some considering VA refinance. Refinancing to a shorter term — say from a 30-year to a 15-year mortgage — may accomplish this goal. Going from a 30-year to a 15-year mortgage can result in a higher monthly payment. Striking when interest rates are low can help make this adjustment more affordable.
Those with equity in their homes might need to obtain cash for debts, home improvements or other important expenses. Using the VA cash-out refinance program can sometimes help borrowers cash in on the equity they’ve accumulated.
If a borrower doesn’t have much equity in the home, and he or she doesn’t have a VA-backed mortgage, then the monthly payment likely includes private mortgage insurance (PMI). Going from a conventional loan to a VA mortgage can eliminate that monthly PMI charge. The federal guarantee on VA loans gives lenders the security they need to do without the backing PMI provides. The monthly savings with no PMI can be in the hundreds of dollars.
Borrowers with existing VA loans may be able to take advantage of the VA Interest Rate Reduction Refinancing (IRRRL) or Streamline program when interest rates are low. VA Streamline refinance loans enable VA borrowers to simply adjust their mortgage rates with less paperwork and a simplified processing. The VA streamline refinance transaction will result in lower interest rates and/or lower monthly payments with fewer costs and qualifying requirements.
Another sound reason to use VA refinance is to get out of an adjustable rate mortgage (ARM) and into a fixed rate mortgage. An ARM has an interest rate that starts low but adjusts with an economic index. Rates usually go up after an initial period. Eliminating the risk of rising interest rates associated with an ARM is a common reason to refinance into a fixed rate VA mortgage. The fixed interest rate will remain the same throughout the life of the loan.
A VA mortgage professional can provide personalized calculations and help weigh the options whatever the borrower’s reason for considering a VA refinance loan.
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