The last 2011 weekly rate report is out from Freddie Mac and it’s more than interesting: A fixed-rate, 30-year loan was priced at 3.95 percent. That’s not the lowest rate for the year (the week before the rate was 3.91 percent, the lowest rate on record) but it’s a steep decline from the 4.86 percent that closed out 2010 and by the standards of the past 50 years it’s a remarkable bargain.
The fact that there are lower rates has important implications for VA borrowers.
First, mortgages are now more affordable. Imagine a household that can pay $1,300 a month for mortgage principal and interest. At 5 percent over 30 years they can borrow $242,166. Lower the rate to 3.95 percent and the initial loan amount grows to $273,951.
Second, given where rates are today, those with existing VA loans may want to consider a VA refinance.
With a refinance you replace an existing loan with new financing. In the case of VA mortgages this process can be called an “Interest Rate Reduction Refinancing Loan” or IRRRL. No one, of course, uses the term IRRRL. Just say you want a “VA streamline refinance” and everyone will be on the same page.
A few of the basic rules for a VA streamline refinance include:
• You must refinance an existing VA loan.
• The new loan amount cannot exceed the current loan balance plus closing costs. However, there’s an exception to the rule according to the VA: You can increase the loan amount by up to $6,000 if the money will be used for the addition of energy efficiency improvements to the property.
• You cannot get cash from the new mortgage.
• The new rate must be lower than the old rate. There’s an exception to this rule if you refinance from an ARM to a fixed-rate mortgage.
• The VA funding fee is limited to .5 percent of the new loan amount. In addition, the lender may have other fees and charges.
A lower mortgage rate is generally a good thing — but not always.
When you refinance there are certain fees and costs. You can pay these expenses in cash or — in some cases — roll some or all of the closing costs into the new loan. The old loan balance plus new fees and charges will mean that more is owed.
This may not be a problem. Imagine if you refinance a $150,000 and reduce your rate by 1 percent. You’ll save roughly $1,500 per year. If the loan fees and charges amount to $3,000 you’ll need to own the property for two years to break even on the refinancing.
When looking at a refinance you have to consider how much you will save and how long you expect to own the property. There are circumstances where refinancing will work very well — and circumstances where refinancing is not the better choice, typically when the home must be quickly sold or the interest-rate drop is insufficient.
For VA borrowers the good news is that the option of a streamline refinance is available and for many borrowers it can produce real savings.
If you’d like to learn more about rates and timing check out this helpful guide.