Updated: Jun 5
A VA Interest Rate Reduction Refinance Loan (IRRRL) or Streamline refinancing loan is available if you decide you could lower your mortgage payment by refinancing. According to NerdWallet, 17% of homeowners refinance in 2020, and another 31% are presently considering it. Mortgage rates are historically low and may be lower than your present mortgage rate. The question of whether or not refinancing is a good idea can be tricky to answer. A lot depends on how long you plan to be in your home, your current credit score, and your long-term financial goals.
Common wisdom says that a difference of 1% between what you now pay and what you would pay is enough to consider refinancing. There may be times when less than 1% difference could be enough. Pay less attention to low rates you see publicized because they change constantly, and your rate may differ depending on your credit rating and your home's equity. Before making a final decision, get a clearer picture using a mortgage calculator like the one on Zillow or Nerd Wallet.
Long Term Goals
If you are looking to pay off other higher-interest debts and have some equity in your home, refinancing might make sense. If your home needs major repairs or you want to invest in upgrades or improvements in your house, the VA also offers a Cash-Out Refinance Loan. If you want lower monthly payments so you depend less on credit cards, you might want to refinance. If you'd like to pay your home off sooner, changing your term with a refinance can accomplish that. Depending on the interest rate difference, your new payment may not be that much of an increase.
How Much Longer Will You Live in the House?
If you plan on moving in a couple of years, the extra costs involved in a refinance may not be worth it. You’ll need to look at the total costs involved, which will include an appraisal, credit check, and origination fees. On a VA rate reduction loan, you pay a loan fee of only .5%. If you want to take cash out, your fee will be 2.3% the first time you refinance and 3.6% if you refinance again.
Adverse Market Refinance Fee Some traditional loan companies have added a .5% sales tax on refinancing as of December 2020 to offset costs from so many refinances. A VA loan does not have this extra fee.
Early Payoff Penalty- Traditional loans may charge you to pay off early. If you have a VA home loan, there is no fee.
If you have only been in your home for a short time, you may not have much equity unless you made a significant down payment or the price of homes in your area has gone up a lot. Your interest rate will partially depend on your equity or the difference between what you owe and what the house is presently worth. If you want to take cash out, the equity in your house will have to cover the amount. Depending on where you are in the country, there are online resources you can use to estimate your home’s worth.
Keeping an eye on your mortgage loan and payment is a good idea. To decide about when to refinance, consider how long you will stay in the house and your long-term goals. You'll need to check your current credit score and estimate your home’s equity, as well as the difference between present rates and the rate you are now paying. Contact a VA lender for more information.