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There are generally two reasons to refinance any loan—you want a lower interest rate or you want to get cash out of your home. But with Veterans Affair (VA) loans, there can be a third reason: you have a conventional loan you want to refinance into a VA home loan.
Here’s what you need to know about how to refinance a VA loan and options for refinancing.
When to Consider Refinancing a VA Loan
Whether or not you should refinance your mortgage depends on what your end goal is. Here are some reasons refinancing your VA loan might make sense:
- You want to save money. The first step in determining whether you should refinance your home loan is to calculate whether the interest rate will save you money over time, after adding in the closing costs. Whether you have a VA loan and you’re wanting to refinance into a conventional mortgage or you’re wanting to refinance into another VA loan—both options could help you save.
- You want to tap into your home equity. Whether you need extra cash for home improvements or another project, a cash-out refinance loan can help you get money out of your home to cover those costs.
Related: Best VA Mortgage Lenders
What is an Interest Rate Reduction Refinance Loan (IRRRL)?
An IRRRL, or VA streamline refinance, is the loan you would choose if you already have a VA loan and want to reduce your interest rate. For the most part, the application process is similar to applying for any other VA home loan.
Unless you qualify for an exception, you’ll likely pay a new VA funding fee for an IRRRL. The VA funding fee is 0.5% of the total loan value and the fee can be rolled into the streamlined loan. You might be charged other fees, depending on the lender, so always compare offers from a few lenders before you decide.
With an IRRRL, you can extend the term of your loan—if you want to reduce your monthly payment, for instance. You can also still qualify for VA streamline refinance even if your current VA loan is not due. You’ll just need to provide evidence to your lender that the situation causing you to be past due no longer exists and submit documentation to the VA for approval.
Pros and Cons of a VA Streamline Refinance
Here are some things to consider before refinancing into a VA streamline loan.
Pros of a VA Streamline Refinance
- Could lower your interest rate
- You might not have to pay an appraisal fee
- Doesn’t extend the terms of your loan by an unreasonable amount
Cons of a VA Streamline Refinance
- Can’t get cash out of your home
- Only VA-backed loans are eligible
- Can’t choose a new repayment time period that exceeds an additional 10 years
VA Cash-Out Refinance
A VA cash-out refinance is when you take a VA loan or conventional loan and refinance it to tap into your home’s equity and take cash out. You might do this because you want different loan terms or you want the extra cash to cover expenses like a home improvement project. The equity increased in your home is the difference between what your home was worth and your current mortgage balance.
For example: Let’s say you bought your home for $200,000 about 10 years ago. You’ve paid off $50,000 in principal on your loan and the home today is valued at $300,000. This means you have $150,000 in equity. Any cash you get because you paid down the principal can put you towards the starting point of paying off your mortgage.
The VA funding fee for a cash-out refinance is 2.3% the first time. Any future cash-out refinance loans have a fee of 3.6%. You will incur the cost of a new appraisal and other closing costs at the discretion of the lender as well. The maximum loan term for a VA cash-out refinance is 30 years and 32 days.
Pros and Cons of a VA Cash-out Refinance
Weigh these factors before deciding on whether a VA cash-out refinance is right for you.
Pros of a VA Cash-out Refinance
- You get access to your home equity
- It could lower your interest rate
- You have the option to refinance out of a conventional loan
Cons of a VA Cash-out Refinance
- It might take longer to repay your mortgage
- You might end up in a worse situation long-term if you spend all your home’s equity
- Credit and income qualifications are stricter than with an IRRRL
Refinancing a VA Loan Into a Conventional Loan
Conversely, refinancing a VA loan into a conventional loan can help you lower your interest rate and pay less in closing costs.
If you have excellent credit, interest rates on a conventional mortgage refinance could be lower than a VA mortgage refinance. You also won’t have to pay a VA funding fee, which can be up to 3.6% of the loan value. However, you will have to pay for mortgage insurance if refinancing for more than 80% of the home’s value.
Pros and Cons of Refinancing a VA Loan Into a Conventional Loan
Consider these points when determining whether to convert your VA loan into a conventional refinance loan.
Pros of Refinancing a VA Loan into a Conventional Loan
- It could lower your interest rate
- You might have more home equity
- There’s no VA funding fee
Cons of Refinance a VA Loan into a Conventional Loan
- You could lose out on VA payment options (if you have difficulty making payments)
- You can’t refinance the full home value
- There might be a cost for private mortgage insurance (PMI) if you’re financing more than 80% of your home’s value
Compare VA Loan Refinancing Options
Refinancing your mortgage should put you in a better financial position than you were with your original mortgage. No matter which VA loan refinancing option you choose, always compare lender rates and closing costs to find the right fit for you.
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