Refinancing is a financial decision that requires careful consideration despite not being as emotional as buying a home. Refinancing your mortgage to a VA loan or your existing VA loan is primarily based on whether the financial terms make sense.
However, it isn’t always easy for veteran homeowners to determine the optimal time to refinance their loans, which may lead to higher finance charges throughout the loan’s duration.
When talking with a lender you trust, evaluating mortgage offers and assessing what’s in your best interests is crucial.
Let’s discuss why a VA loan refinance may be a good idea.
New Interest Rate is Low Enough
Refinancing your mortgage can be beneficial when market interest rates drop below your current loan’s rate because it can lower your monthly payments and the amount of interest you pay overall.
Many homeowners can benefit from a monthly mortgage payment reduction. In contrast, Veterans with current VA mortgages are the only ones eligible for the VA’s main refinance program, the Interest Rate Reduction Refinance Loan (IRL).
IRRRLs require rate reductions based on changes in loan rate basis points, with one basis point representing 1% of the loan.
The basis points change required to meet rate reduction requirements is dependent on the specific circumstances of your refinance:
- Fixed-Rate VA Loan to Fixed-Rate VA Loan: The new VA loan rate must be at least 50 basis points lower than the current fixed interest rate.
- Fixed-Rate VA Loan to Affordable-Rate VA Loan: To switch from a fixed-rate VA loan to an affordable-rate one, the new rate must be at least 200 basis points lower.
- Adjustable-Rate VA Loan to Fixed-Rate VA Loan: VA homeowners transitioning from adjustable-rate mortgages to fixed-rate loans do not need to meet any rate requirements.
For example, if you have a VA loan with a fixed 3.5% rate, the refinance rate for a new loan must be at least 3% to be 50 basis points lower.
Shortening Your Loan Term
Refinances may not always provide immediate financial savings. In fact, transitioning from a 30-year term to a 20- or 15-year term typically results in increased monthly payments towards principal and interest.
However, reducing the length of your loan can result in significant interest savings over time. In this situation, it is crucial to make sure you can afford the increased monthly mortgage payment.
Another option for Veterans is to pay an additional monthly or annual amount towards their principal balance instead of refinancing into a shorter loan term.
Times when you Consider VA cash-out refinance
VA cash-out refinance often benefits homeowners with substantial property equity who are confident in covering increased mortgage payments. But the reason you need the money may also play a role. If you want to reduce your interest rate or monthly payment, Veteran Refinancing loans such as a VA Interest Rate Reduction Refinance Loan is a smart choice.
Here are some good reasons for pulling cash out of your home.
Home improvements and repairs
According to Jason Bower, many individuals struggle to afford home improvements. A cash-out VA refinance can be a great way to finance improvements that yield a high return on investment, such as new windows, siding, or roofs.”
It can be wise to use cash-out refi funds for major repairs, remodeling, and upgrades because you are utilizing your home equity to increase the value of your house, which raises your investment in homeownership.
Consolidating debt
Switching high-interest credit card debt with mortgage debt may be good, as it historically offers reduced interest rates. However, there is an important caution: If you use cash-out refi money to pay your bills and accumulate large credit card debts again, you can find yourself in a more precarious financial position with less home equity to soften the impact.
