The VA home loan program is best known for enabling veterans buy a home without a down payment (100% financing), but there are reasons why you should consider it for refinancing, as well.
Here’s a quick recap of the virtues of the VA Home Loan:
- 100% financing. Most veteran buyers are attracted to the fact that they can buy their home with no down payment, no mortgage insurance, and in many cases, no cash out of pocket at all. A VA loan can also be used to refinance to 100% of the appraised value of the property. This can be especially helpful if your property’s value is still recovering.
- Lower rates. VA loans typically have rates .375% lower than conventional loans. The monthly payment on a $300,000 loan is about $62 lower than for a conventional loan of the same size.
- Easier qualifying. Veterans can qualify for larger mortgages based on their income and payments to other accounts. Also, in general, VA borrowers are not penalized for lower credit scores, as they would be for a conventional loan; the rate for a conventional loan rises .75% for a borrower who has a 620 credit score compared to a borrower with a 740 score. VA loans do not carry this kind of adjustment for lower credit scores.
- No funding fee for disabled vets. Most veterans pay a funding fee to the VA. This fee is between 2.15% and 3.3% of the loan amount. It is a cost, but it is not out-of-pocket, since it is added to the initial loan balance. Any veteran with a service-connected disability as low as 10% is exempt from the funding fee. If you receive monthly non-education compensation from the VA, you probably qualify for the exemption.
What are the unique benefits of refinancing with the VA?
Is a VA loan your best choice for refinancing your conventional loan? To answer that question, you should have some idea of what your home is worth. If your goal is simply to improve the rate of your existing loan without withdrawing any cash, you should determine whether the new loan will be more or less than 80% of your home’s appraised value. If will be above 80%, then a VA loan is definitely your best bet; you won’t have to pay for mortgage insurance, which could run several hundred dollars a month.
If you plan to take some cash out of your home, the VA loan wins again. The rate for a “cash-out” conventional loan is nearly .25% higher than for a loan where the borrower takes no cash out. The VA loan has no such adjustment. Additionally, a veteran homeowner will be able to get a loan for the full value of the home—with no adjustment to the interest rate.
You should also have some idea how long you plan to stay in your home. If your goal is simply to reduce your interest rate rather than taking cash out of your equity, you should consider how long it will take to recover the closing costs. This is easier than you might think. Here are the steps to take:
- Add up the non-recurring closing costs. These are the costs that happen only once, as opposed to those that you pay regularly. Title and escrow fees, processing, underwriting, appraisal and the VA funding fee are the largest non-recurring costs. You should NOT count prorated interest, property taxes or the initial deposit to your new impound account for taxes and insurance. Let’s assume your closing costs add up to $10,000 including the funding fee.
- Multiply your new loan balance by the difference between your new loan and your old one. If your rate today is 4.25% and your new VA loan will be 3.25%, the difference is 1%. If your new loan balance will be $350,000, your annual savings will be approximately $3,500 ($350,000 x 1%).
- Divide the closing costs by the interest savings. This will show the number of years to recover the closing costs—to “break even.” In this example, that time would be 2.86 years—about 2 years and 10 months. If you plan to be in your home for a long time, you might view this recovery time as reasonable. If, on the other hand, you think you may sell in a short time, you might be better off just to keep your present loan.
- If you have a service-connected disability and are exempt from the funding fee, the choice becomes much easier because your closing costs will be much lower.
The VA Home Loan Program has helped millions of veterans become homeowners by doing away with the down payment requirement. Even if you have never used your VA entitlement and have a conventional loan, the VA loan can still be a clear winner for you in your refinance.
Some factors in getting a refinance apply to all types of loans, whether or not you choose to use a VA loan. To learn more about the refinance process, click the button below and download our informative ebook.