VA loans offer tremendous benefits for military home buyers, but it doesn’t stop there! You can also refinance your home with a VA loan. Here are the answers to some of your questions about this process.
What is a VA Refinance Loan?
A VA refinance loan is a home financing option that you can use to replace an existing mortgage loan with a new VA loan. VA refinance programs give active duty and retired military service members access to traditional mortgage refinance options with the perks of a VA Loan. Keep reading to learn the following about VA refinance options:
- Reasons to consider a VA refinance loan
- VA refinance mortgage options
- VA mortgage refinance guidelines
- VA refinance closings costs (VA Funding Fee)
Reasons to Consider VA Refinance
- To refinance a Conventional, USDA, or FHA loan
- Pay off other debts
- Lower your interest rate
- Reduce your monthly mortgage payment
- Convert from a fixed to an adjustable-rate mortgage
- Get cash for home improvements
- Down payment for a second home or investment property
- Pay off a construction loan
1) Refinance a conventional, USDA, or FHA loan.
For various reasons, a veteran may have something other than a VA loan. Maybe the eligibility was tied up at the time the mortgage was obtained. What if the Veteran put down 20% or more and wanted to save their VA eligibility? Maybe paying the funding fee wasn’t the best scenario then.
2) Pay off other debts.
Maybe because of paying down the mortgage balance and an increase in appraised value, there is sufficient equity that could be used for consolidating debts. Paying off higher interest rate cards, loans, tax liens, home equity line of credit, mortgages on another property, or more could make sense. Among other things, paying off debts could increase cash flow for the household, but always think through adding unsecured debt to your home. If the mortgage is not paid on time, then it could result in foreclosure.
3) Lower your interest rate and lower your mortgage monthly payment.
If interest rates are lower today than the day that you purchased your home, a refinance is a smart move to help you reduce the amount of interest you will pay during the life of your loan. This may result in a lower monthly mortgage payment as well.
4) Convert from a fixed to an adjustable-rate mortgage.
Although adjustable-rate mortgages are not as common as a fixed rate, this might be an option to consider if it’s the right move for your unique financial situation. Be sure to consult with your loan officer before making this transition.
5) Cash for home improvements.
Are there improvements or additions desired for the home? Often there are home improvement projects such as a kitchen or bathroom remodel, but cash is not available to make the improvements. If the cash is available, it could still make sense to include it in the mortgage instead. With equity in the home accessed by a VA cash-out refinance, it could allow the funds needed. Although, keep in mind that the home must be in good condition at the time of the appraisal. Additionally, there can be no work in progress at the time of the appraisal.
6) Cash in hand.
Sometimes there are just reasons to get cash. Maybe it is to pay a large IRS bill due, help a relative with a situation, pay for college rather than a student loan, or others. For the most part, cash may be received by the borrower from a refinance.
7) Down payment for a second home or rental.
Let’s say a veteran wants to buy a vacation home or start investing in rental properties. Well, a cash-out refinance could allow the veteran to access the down payment funds for this purchase. A mortgage on the new property could be combined with the cash from the VA refinance to make the purchase.
8) Pay off a Construction Loan.
A popular benefit of a VA refinance loan is that it will pay off a construction loan used to build a primary residence. The construction loan helps build the home and VA will lend up to 100% of the appraised value to pay off the construction. The value is based on the “as-completed” value too. This is a great advantage over other types of loans that require equity in the property or down payment to pay off construction loans.
VA Refinance Options
- VA Cash-Out Refinance
- A VA-backed refinance option that will allow you to take cash out of your home equity or transition from another loan type to a VA loan.
- VA Streamline IRRRL
- IRRRL is a streamlined refinance program for existing VA borrowers. IRRRL stands for interest rate reduction refinancing loan.
The major difference between the two is that a VA IRRRL is used to refinance existing VA loans and does not offer a cash-out option. The VA IRRRL is perfect for a VA borrower who’d like to get a lower interest rate or reduce their monthly mortgage payment.
How Soon Can You Refinance a VA Loan?
VA interest rates can drop very quickly. Thus, veterans want to take advantage of lower interest rates and payments if it makes sense. To protect veterans, The Economic Growth, Regulatory Relief, and Consumer Protection Act requires the following before closing a new VA loan:
- 210 day (roughly, 6 month) seasoning period starting with the first payment made by the borrower
VA Funding Fee (Closing Costs) for VA Refinance Loans
As mentioned before, VA loans typically have a funding fee that may be financed into the loan. The amount of the VA funding fee is based on several factors including the type of military, first or subsequent use, and disability status. VA purchase loans allow for a reduced fee of 5% or more equity. Although, cash-out refinancing does not offer this discount.
Is a Cash-Out Refinance Right For You?
Whether you’re upgrading your home, paying off other debt, or simply need some cash, a cash out refinance may be the solution you’re looking for.