When using a VA loan to buy and finance a primary residence there may be another time down the road where the original loan should be replaced and refinanced with a new mortgage. A refinance is indeed a brand new loan and whether the veteran decides to refinance to a lower rate, change the loan term or switch to an adjustable, there are ways to tell when refinancing a VA loan is a good idea.
The most common reason to refinance a VA loan is when mortgage rates fall lower than what is on the current note. Mortgage rates rise and fall over time and if someone has a VA loan with say an interest rate of 5.00% and rates fall to say 4.00% a refinance might be a good idea. But pay less attention to the rate and more on what the rate actually represents- your monthly payment. When thinking about refinancing a VA loan compare the current monthly payment with the prospective one. Take the difference between the two payments and divide that amount into all the closing costs associated with the new VA loan. The result is how many months it will take to recover the closing fees and benefit from the lower payment. Anything less than 48 months means it’s something to consider. However, the longer you own the property the more you can benefit from a refinance.
Do you have an adjustable rate mortgage or a hybrid that’s about to convert to an annual adjustable rate loan? Then you might think about refinancing the existing adjustable rate to a fixed rate if you plan on keeping the property longer. When interest rates are low it’s always a good idea to think about getting out of an ARM and into a fixed rate loan.
Another reason to refinance might be to shorten the term on the loan. Most VA loans are spread out over 30 years and that helps keep the monthly payments low but other, shorter terms are also an option. For example, a 15 year fixed rate term will have a slightly lower rate but higher payments because the loan is paid out in half the time. However, the advantage is not the payment but the dramatic reduction in interest paid to the lender over the life of the loan.
Finally, a refinance might be worth the effort if you have 20 percent or more equity in the property. Why? Because all VA loans have a funding fee which is rolled into the loan amount but still increases the amount borrowed. If you have more than 20 percent equity you may want to consider a conventional loan, those using Fannie Mae or Freddie Mac guidelines because those programs don’t require a funding fee nor do they ask for mortgage insurance either if the amount borrowed is at or below 80 percent of the current value of the property.
But before you get too far in the process you should pick up the phone and talk to an experienced VA loan officer who can help steer you in the right direction and run some numbers with you to see whether or not refinancing an existing VA mortgage is right for you.