Should You Use a VA Refinance? 4 Steps to Decide

Refinancing with a VA home loan can make sense if it lowers your monthly cost, helps you remove mortgage insurance, or supports a cash-out goal on better terms than your current mortgage.

The key question is not just whether you qualify for a VA loan, but whether refinancing will actually improve your situation. That usually depends on your current loan type, how much equity you have, whether you want cash out, and how long it will take to recover your closing costs.

Advantages of a VA Loan

Here’s a quick recap of the virtues of the VA Home Loan:

1. 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.
2. Lower rates. VA loans typically have interest rates that are usually lower than conventional loans—by as much as a full percentage point. That can mean a lower monthly payment on the same loan amount.
3. Easier qualifying. Veterans can qualify for larger mortgages based on their income and payments to other accounts.
4. No funding fee for disabled vets. Most veterans pay a funding fee to the VA. 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.

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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 it 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, a VA loan may still be worth a look. Certain conventional cash-out refinance transactions can carry loan-level price adjustments based on the LTV ratio and credit score. 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.

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Does Refinancing With a VA Loan Make Sense For You?

You should also have some idea how long you plan to stay in your home. If your main goal is to reduce your rate or monthly payment rather than take cash out or make a major term change, it helps to estimate how long it will take to recover the closing costs. Here are the steps to take:

1. Add up the non-recurring closing costs. These are the refinance costs you pay because you are replacing the loan, such as title and escrow fees, processing, underwriting, appraisal, and the VA funding fee. You should NOT count prorated interest, property taxes, or the initial deposit to your new impound account for taxes and insurance, because those are not really costs you recover through the refinance itself. Let’s assume your closing costs add up to $10,000 including the funding fee.
2. Estimate the annual interest savings from the lower rate. 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%).
3. Divide the closing costs by the estimated annual savings. This shows how long it may take to recover the refinance costs—to “break even.” In this example, that time would be 2.86 years—about 2 years and 10 months. If you expect to stay in the home longer than that, the refinance may be worthwhile. If you may sell or refinance again before then, keeping your present loan could make more sense.
4. 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. Just remember that this break-even test is most useful when your goal is rate-and-payment savings. If you are refinancing mainly to take cash out or to change the loan term, you should also weigh those benefits separately.

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.

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Have Questions About Mortgages?

Sammamish Mortgage can help. We serve clients across Washington, Idaho, Colorado, Oregon, and California. Since 1992, we’ve been providing several mortgage programs and products with flexible qualification criteria to borrowers across the Pacific Northwest. Visit our website to get an instant rate quote or to use our online mortgage calculator. Or, reach out to us if you are ready to explore your refinance options.