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Refinancing Your VA Mortgage: A Comprehensive Guide

Refinancing could significantly reduce your monthly payments if you’re a veteran homeowner with a VA mortgage. However, refinancing is a complex process that requires careful consideration of your goals, finances, and options.

In this comprehensive guide, we’ll cover everything you need to know to make an informed decision about refinancing your VA mortgage. From eligibility requirements to determining potential savings, we’ll explore the ins and outs of VA refinancing in depth. By the end, you’ll understand the refinance process, know whether it makes sense for your situation, and know how to get started.

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Let’s begin our exploration of refinancing your VA mortgage.

Is Refinancing Right For You?

Before diving into the specifics of a VA refinance, take some time to evaluate whether refinancing is the right choice for your situation. Here are some key questions to ask yourself:

How Long Do You Plan to Stay in the Home?

Generally, it only makes financial sense to refinance if you plan to stay in the home long enough to recoup the closing costs from the new loan within a few years. Closing costs for a refinance average around $5,000, so weigh whether the potential savings outweigh these upfront fees given your timeframe. Most lenders recommend staying put for at least 2-3 years to break even.

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Has Your Credit Improved Since Your Original Loan?

If your credit score and debt-to-income ratios have increased significantly, you may qualify for a lower interest rate, reducing your monthly payments and interest costs over time. Credit history is a major factor lenders consider.

Have Interest Rates Dropped Since Your Original Loan?

Interest rates fluctuate daily based on market conditions. If rates have declined meaningfully since your initial mortgage, refinancing at a cheaper rate could save you money each month and over the full loan term. Check current VA rates to see if there’s an opportunity.

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Is There Equity in Your Home You Could Tap Into?

While not required for a straight refinance, you may want to consider cashing out some equity for home improvements, debt consolidation, or another large purchase if rates make it worthwhile. Just be cautious not to take on more debt than you need.

Are You Making Extra Payments or Paying Off Soon?

If you’re dedicated to paying off your loan early or making additional principal payments each month beyond the normal amount due, refinancing may not provide significant long-term savings. Your goal is a more aggressive payoff rather than lowering monthly obligations.

Taking stock of factors like these will help determine if refinancing pencils out financially for your specific situation or if you’re better off keeping your current loan. Use the information throughout this guide to run some sample calculations, too.

VA Refinance Eligibility Requirements

To refinance an existing VA loan, you must meet basic eligibility requirements set by the VA. Here are the primary criteria to qualify for a VA refinance:

Veterans Status

You must be an eligible veteran, service member, or surviving spouse to utilize the VA home loan benefit. The VA provides definitions of who qualifies.

Occupancy Requirements

To refinance, the home being refinanced must be your primary residence. Investment properties or secondary homes do not qualify for a VA refinance.

Loan-to-Value Limits

The maximum loan amount for a VA refinance is determined by the loan-to-value (LTV) ratio. The LTV is the ratio of the loan amount to the estimated home value. For a standard VA cash-out refinance, the maximum LTV is generally 90% (leaving 10% in equity).

VA Funding Fee Requirement

Borrowers must pay a one-time VA funding fee, usually ranging between 1.4-3.3% of the loan amount. These fees help offset costs to taxpayers. The fee is usually wrapped into the new loan amount.

Credit Score & Qualification Standards

You’ll need to meet the lender’s minimum credit score requirements, which are usually in the 620+ range for a VA refinance. Debt-to-income ratios must also fall within the lender’s guidelines, usually 43% or less for the total debt ratio.

Provided you meet these basic criteria as a veteran homeowner, you can explore refinancing options with approved VA lenders. While not an exhaustive list, these are the primary eligibility factors to keep in mind.

Refinance Options: VA IRRRL vs. Standard Refinance

Within the VA refinance space, borrowers have two main options to choose from – the Interest Rate Reduction Refinance Loan (IRRRL) and a standard (or cash-out) VA refinance loan. Let’s dig into the key distinctions between these alternatives.

VA Interest Rate Reduction Refinance Loan (IRRRL)

The IRRRL is exclusively for refinancing existing VA loans to reduce the interest rate without cashing out equity. It has streamlined processing and documentation requirements as well as no borrower funding fees. The IRRRL is ideally suited for interest rate savings without remodeling costs or credit issues involved.

Standard VA Refinance

For circumstances beyond a basic rate reduction, the standard VA refinance allows tapping home equity for uses like debt consolidation, renovations, education expenses, or cash savings. It has higher maximum loan limits than the IRRRL and can incorporate closing costs into the loan. However, standard refinances do require payment of VA funding fees.

Summary of Major Differences:

IRRRL

  • Streamlined process
  • No cash out allowed
  • No funding fees
  • Lower maximum loan limits
  • Faster closing

Standard Refinance

  • More flexibility for cash out/debt payoff
  • Can include closing costs in the loan amount
  • Higher maximum loan limits
  • Requires payment of VA funding fees

Weigh your goals and situation to determine if the streamlined IRRRL or more robust standard refinance best fits your needs. Always shop lenders for the best terms, too.

Calculating Potential Refinance Savings

Before applying for a VA refinance, it’s crucial to run the numbers and calculate potential savings. This will help you understand if refinancing makes financial sense in light of closing costs.

Here are the key steps to estimating your savings:

Gather Loan Details:

  • Current mortgage balance
  • Current interest rate
  • Current monthly payment (principal, interest, taxes, insurance)
  • Remaining loan term

Get Rates & Calculate:

  • Contact 2-3 lenders for current VA rates
  • Choose a potential new rate to calculate with
  • Determine how long it may take to recoup closing costs
  • Calculate new monthly payments and interest paid over full term
  • Subtract from current totals to find savings

Tips for More Accuracy:

  • Factor in taxes and insurance changes over time into calculations
  • Input potential extra/lump sum payments each year
  • Run “what if” scenarios changing rates, terms, payment amounts

Use an online mortgage refinance calculator or mortgage payment calculator to do the math easily. Taking the time for thorough analysis upfront will reveal if refinancing makes economic sense for your specific situation.

The Refinance Process

Understanding the basic refinance process will help you know what to expect and stay organized. Here are the primary steps:

1. Gather Documents

Secure documents like photo ID, proof of income, home ownership records, and most recent mortgage statement. Consider obtaining your credit report ahead of time as well.

2. Shop and Compare Lenders

Research top local and online lenders and compare quotes, terms, and fees. Focusing on just a few top options is key here.

3. Apply and Get Pre-Approved

Submit the application and documentation to your selected lender for review and pre-approval.

4. Appraisal and Title Work

An appraisal will verify that your home value meets the requirements. Title and escrow companies will research home ownership records.

5. Underwriting Review

Your application undergoes final verification of income, assets, credit, and other details before approval.

6. Closing Preparation

Request final closing disclosure from the lender. Review figures, dates, and schedules before signing final papers at closing.

7. Closing Meeting

Sign paperwork, pay closing costs, and receive remaining funds from refinance at the closing table with lender reps.

8. Monitoring and Maintaining

Keep an eye on account statements and payment due dates with the new servicer going forward. Maintain homeowners insurance as well.

The entire process takes 4-6 weeks typically, assuming prompt responsiveness on all fronts. Stay organized during these weeks and meet deadlines or it may extend. Communicate any hiccups to your lender promptly as well.

Refinance Closing Costs to Expect

When determining refinance costs, it’s important to understand all associated fees and expenses upfront to calculate breakeven analysis accurately. Common closing costs run around $5,000 on average, but specific totals will vary based on your location and lender. Here are some of the main closing cost line items to anticipate:

Origination Fee – Charged by the lender to cover administrative work, ranges from 0.5-1% of the loan amount.

Appraisal Fee – Paid to appraisal company, around $300-500 depending on property/market. It may be waived by some lenders.

Credit Report Fee – Fee for lender to pull your credit report, usually $25-50.

Title Insurance Fee – One-time insurance paid to the title/escrow company, typically 0.5-1% of the loan amount.

Transfer Taxes – States and counties may charge a percentage of the loan amount as a transfer tax.

Underwriting Fee – Fee to review loan application, generally $300-500.

VA Funding Fee – Required for standard VA refinance only; amount varies based on down payment.

Prepaid Items – Include upfront payments for homeowner’s insurance and property taxes.

Factor in all applicable closing fees to get a complete picture of refinancing costs. There may also be minor additional charges like notary, courier or recording fees to consider. Ask your lender for a formal closing cost estimate to verify numbers.

Some lenders offer programs like “no closing cost” refinances where certain typical fees are credited or waived, helping offset costs. Pre-qualifying with multiple lenders is key to finding the most competitive offers.

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