How to refinance your VA loan |
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How to refinance your VA loan

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Find out if and how a new loan can benefit you.

Times change. A mortgage from 10 years ago might not be right for your situation today. Refinancing your VA loan can help you take advantage of lower interest rates, reduce the length of your term or provide access to cash.

Can I refinance a VA loan?

In most cases, yes. VA loans tend to offer flexibility and have attractive rates and terms, making them a popular choice. There are two ways to refinance a VA loan:

IRRRL or streamline refinance

IRRRL stands for Interest Rate Reduction Refinance Loan and is often called a streamline refinance because it requires less paperwork than any other VA loan. In fact, it doesn’t require any documentation of income, tax returns or employment verification.

This option allows a qualified borrower to easily refinance their current mortgage to a lower interest rate, saving money on administration fees and interest payments.

Cash-out refinance

If you’re looking for extra cash to pay down debts, cover the cost of home repairs or anything else, you may want to consider a cash-out refinance. This option replaces an existing loan and pulls equity from the property in exchange for a cash payout.

A cash-out refinance is a bit more complicated than an IRRRL, as it’s fully documented and requires things like pay stubs and tax returns.

The amount of cash available from a cash-out refinance depends on the value of your property, but most lenders will issue loans for up to 90% of the appraised value. For example, a $200,000 loan on a property with an appraised value of $250,000 is eligible for a cash-out to refinance of 90%, making the new loan amount $225,000. The amount of cash available is roughly $25,000, which is the difference between the old loan and new loan, less closing costs of the initial loan.

How to refinance a VA loan

Whether you’re looking to convert your non-VA loan or adjust your repayment terms on an existing VA loan, refinancing is similar to applying for a first mortgage:

1. Define your goal. Do you want a lower interest rate? A shorter repayment term? Longer repayment term? Access to cash? Determining what you want helps you narrow down the right refinancing option for your situation.

2. Pick your program. Consider your goals to determine whether an IRRRL or cash-out refinance refinance is right for you.

3. Find a lender. Compare your existing interest rate and terms to VA loan options, then do a break-even analysis to find out if it’s worth refinancing. Finally, shop around to find a lender that meets your needs.

4. Submit paperwork. Just like a standard mortgage, you’ll need to submit paperwork to apply for refinancing. An IRRRL requires far less documentation than a cash-out refinance because it doesn’t replace the existing loan.

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When should I refinance my VA loan?

It depends on your reasoning for refinancing. If you’re looking for a lower interest rate or lower mortgage payments, look into an IRRRL as soon as interest rates drop below your current rate. While it’s important to take closing costs into consideration, you can include all refinancing costs in your new loan or opt for negative points to allow your lender to cover the closing costs.

Private mortgage insurance isn’t required for VA mortgages, so there’s no need or requirement to build equity before refinancing.

What to watch out for.

  • An IRRRL must result in a lower interest rate than your initial loan, but there’s an exception when refinancing an ARM to a fixed-rate loan.
  • While VA loans don’t require down payments or PMI, putting down 5% or more can help you reduce the VA Funding Fee.
  • If you choose to refinance an existing VA loan to a conventional or FHA mortgage, you’ll need to abide by respective down payment, DTI, credit score and PMI requirements.
  • The interest rate may increase when refinancing from an existing VA ARM to a fixed rate loan.
  • While refinancing could reduce your interest rate, shortening your repayment term could increase monthly payments.
  • IRRRLs are only available on existing VA loans. Conventional and FHA loans are not eligible.
  • VA loans are only available on primary, owner-occupied properties.
  • Including refinancing costs in your new loan will likely increase your interest rate.

What are my refinancing options with a VA loan?

If a VA loan isn’t the right fit for your situation, you could consider refinancing your existing loan into another type of home loan:

VA refinance eligibility

If you’re ready to refinance into a VA loan, start by ensuring you meet the following eligibility requirements:

  • Certification that you’ll be occupying the home.
  • Approved application for a Certificate of Eligibility.
  • Debt to income ratio below 41%.
  • Stable, reliable income.
  • Credit score above 500 — though most lenders require 580 or higher.

Bottom line

You can refinance to take advantage of lower interest rates, reduce your monthly mortgage payment, adjust your repayment term and more. But watch out for eligibility requirements and closing fees that could get in the way. Compare refinancing options to find the right one for you.

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