Tips & Special Topics
Checklist: Reasons for a VA Refinance Loan
Added September 27, 2011
To refinance or not to refinance, that is the question for many borrowers. Sometimes refinancing a mortgage can make sense. In fact, there are many good reasons to refinance a home loan. Using a checklist may help military members decide whether now is the time for a VA refinance loan. Answering yes to one or more of the following questions may mean that a refinance is worth looking into:
• Can a VA refinance be used to obtain a lower interest rate?
• Is the cost to refinance justified with lower monthly payments?
• Can refinancing help build equity faster?
• Is there a need for cash out of equity?
• 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?
Those considering a
VA refinance should first define their goals. If lower monthly payments are top of the list, then a lower interest rate may be the only reason some need to go ahead and refinance. But, many advisors recommend that borrowers calculate the “break-even” point first. The break-even point is where the lower monthly payments achieved through refinancing justify the costs. Origination fees, appraisals, VA funding fee and other costs will likely be charged during the refinance. Calculating the “break-even” point can help borrowers understand when the true savings of refinancing a mortgage loan are realized. For instance, if the total refinancing costs are $6,000 and the refinance results in monthly payment savings of $300, then a break-even calculation may look something like this:
$6,000 ÷ $300 = 20 months to break even
Lower monthly payments are not always the goal for borrowers considering refinancing. Some may want to build equity faster or own their homes outright sooner. Therefore, refinancing the terms of the loan from a 30-year to a 15-year mortgage may make sense. Going from a 30-year to a 15-year mortgage can significantly increase the monthly payment. Therefore, refinancing when the interest rates are lower can help make this adjustment a little easier.
Some borrowers already have equity in their homes and need to obtain cash out. Using the
VA cash out refinance program can help some borrowers get cash out of equity for paying down debts, making home improvements or sending kids to college.
If a VA-eligible borrower has a conventional loan and is paying private mortgage insurance (PMI), a VA mortgage can help eliminate that monthly charge. Because VA loans are guaranteed by the federal government, there is no need for mortgage insurance. Refinancing from a conventional to a VA mortgage to save on PMI can make sense, especially if the transaction results in a lower interest rate to boot.
Borrowers who already have a VA loan, but simply want a lower rate, may be interested in the VA Interest Rate Reduction Refinancing or Streamline program. This program enables the VA borrower to simply adjust his or her mortgage rate with less paperwork and a simplified underwriting process. The
VA streamline refinance often results in lower interest and/or lower monthly payments with fewer costs and qualifying requirements.
Another good reason to choose a VA refinance is to eliminate the risk of the rising interest of an adjustable rate mortgage or ARM. An ARM has an interest rate that is dictated by an economic index. Rates periodically go up or down depending on the index. The interest rate on an ARM starts lower than that of a fixed rate mortgage. Once the initial low-rate period is up, the ARM rate can adjust upward. Getting out of an ARM after the initial low-rate period to avoid rising interest is a common reason to refinance into a
fixed rate VA mortgage where the interest stays the same throughout the life of the loan.
Whatever the reason for considering a VA refinance loan, a VA mortgage professional can give you personalized numbers to consider and help you weigh the alternatives.
