- Step 1: Define your goal
- Step 2: Determine which Refinance program you want to use
- Step 3: Find a lender
- Step 4: Filing paperwork
- Step 5: Close
- The Bottom Line
Most people refinance a VA loan to get a lower interest rate and monthly payment, but those things alone are not enough to justify it. There is the timing. There's no point in refinancing if you're not going to stay in long enough to cover the associated costs. It also doesn't make sense if you can't get a lower interest rate. Assuming timing and prevailing interest rates are not an issue, your first step should be to determine why you want to refinance your VA loan.
Step 1: Define your goal
- Lower your interest rate and monthly payment?
- Convert an adjustable-rate mortgage (ARM) to one with a fixed rate?
- Shorten the term of your existing VA loan?
- Take out cash (equity) for home improvement, debt consolidation, or another purpose?
- Refinancing a conventional or FHA loan to a VA loan?
- Consolidate a first and second mortgage into one VA loan?
You may be able to achieve more than one goal with your refinance – lower interest rate plus payoff, but you should still identify a single "most important" reason for refinancing.
Step 2: Determine which refinance program you want to use
If you have a refinancing goal, the next step is to figure out which of the two VA refinancing options available will best help you achieve that goal. Choose between an interest rate reduction refinance loan (IRRRL) or a cash-out refinance loan.
IRRRL (sometimes called VA streamline refinancing or VA-to-VA refinancing) is specifically designed to simplify the process of refinancing an existing VA loan to obtain a lower interest rate and payment. .. You can also use an IRRRL to refinance an ARM into a fixed-rate loan or to shorten the term of an existing loan-for example, to convert a 30-year loan into a 15-year loan.
An IRRRL must result in a lower interest rate than you paid on the refinanced loan. The only allowable exception is refinancing an ARM into a fixed-rate loan. In this case, the interest rate may increase. In most cases, an IRRRL results in a lower monthly payment. Depending on the rate reduction, your payment may actually go up if you refinance a 30-year loan to 15 years.
Key features of an IRRRL include a lower interest rate and interest rate, less paperwork, and lower closing costs. You can learn more about IRRRL here.
Regarding your second option, the main purpose of a refinance payoff is to allow you to withdraw some of the equity you've built up in your existing VA home loan. You can use the money you spend on a home improvement project, pay off debt, go to school, or some other purpose.
The cash-out refinance option can also be used to refinance a conventional or FHA loan for a VA loan (assuming you are eligible for a VA loan). Depending on the lender, you can also use this option to combine a first and second mortgage into a VA loan.
Key features of a cash-out refinance include up to 100% financing and standardized (tiered) VA closing costs. Generally, the refinance payment does not offer a reduced paperwork burden that occurs with an IRRRL. For more information on refinancing withdrawals, click here.
Step 3: Find a lender
Once you know which VA refinance option meets your needs, it's time to find a lender. Unfortunately, the VA doesn't offer much guidance when it comes to choosing a lender. It publishes a website that provides quarterly lists of the top 300 VA lenders in various categories by volume. You don't have to use the lender that funded your original VA loan, but it makes sense to get that company's interest rate, loan costs, and available terms – especially if you've been happy with the lender so far.
You should compile a list of several VA-approved lenders. (Lender websites will indicate whether the lender is "VA approved".) It's worth noting that many lenders offer VA loans, but not all are VA approved. VA-approved lenders are better informed, offer more services and have more authority than other lenders. This can make approving your refinance much smoother and avoid having your application denied because the lender doesn't know about an obscure VA rule.
The best way to check rates, according to MilitaryTimes, is by phone call. You might phrase your request this way, "I need a quote for a 30-year, fixed-rate loan of 150.000 dollars with no points. My credit is excellent. Please provide your allowable VA fees. "Substitute your own pertinent information in the review process, of course.
Step 4: Submit paperwork
From here on out, your lender will provide instructions, though it's important to know what to expect. The next step is to file proper paperwork, depending on the type of VA refinance option you've chosen.
As mentioned above, the IRRRL offers reduced paperwork requirements and lower closing costs. The cash-out refinance has more typical VA requirements, similar to your original VA loan. This could include the need for an assessment, credit and employment verification, and other items.
If you are refinancing an FHA or conventional loan for a VA loan, you will need a Certificate of Eligibility. If you don't have one, your VA-approved lender can get it for you, or you can get it yourself. For more information, click here.
Step 5: Closing
Closing is the final phase of the refinance process when papers are signed and your new loan becomes effective. One part that deserves special mention is the VA funding fee. Almost all veterans pay a financing fee at closing. It is a percentage of the total loan amount and can be as high as 3.3% for certain borrowers.
In addition to the finance charge, other potential loan costs that close include appraisal costs, credit report, state and local taxes, and recording fees. All of these costs can be added to the loan, but this could cause the market value of the property being refinanced to be exceeded, reducing the benefit to you.
Know that closing costs are lower for an IRRRL than for a cash-out refinance. Although no lender is required to grant you an IRRRL, the VA does not require an appraisal or credit underwriting. If you have questions during the closing process that the lender can't answer, the VA recommends that you contact the appropriate regional credit center.
The Bottom Line
As complex as it sometimes sounds, the biggest benefits of refinancing a VA home loan are the ability to refinance up to 100% of the home's value and the fact that you don't have to pay mortgage insurance. Benefits, of course, are not reasons. These appear under the list of objectives in Step 1. If you define your goal, follow the steps above, find a reputable lender, and complete all the required tasks, you will have made your way through the VA refinancing jungle relatively unscathed. (For more information, see How to Buy a Home with a VA Loan and. The unique advantage of VA mortgages .)