Home refinance is an attractive option for many military homeowners. Just as there are benefits to veterans borrowing through the VA home loan program, there are special refinancing options for qualifying veterans.
Many veterans want to tap into the equity in their homes while others have sought to simply lower their monthly payments. The VA has refinance programs designed to help borrowers do both.
Overall, the refinance climate has tightened in the last few years. But borrowers with solid credit scores and equity can still snag significant savings.
The VA Streamline, which is officially known as an Interest Rate Reduction Refinance Loan, or IRRRL, exists to get veterans into a lower-rate mortgage with lower monthly costs.
Unless the borrower is refinancing an adjustable rate mortgage, a lower interest rate and lower monthly costs must be achieved in order to refinance under the program. Borrowers cannot get cash out on a VA Streamline.
Buyers may be able to obtain a VA Streamline without needing to hit a lender's credit score benchmark or to have an appraisal. Policies and guidelines can vary by lender. Borrowers are also required to pay a VA Funding Fee of 0.5 percent on a Streamline refinance.
Origination fees and total costs are capped to keep the up-front costs as low as possible. These fees can be minimal if borrowers pursue a refinance with the same lender who generated their purchase loan. Refinancing may result in higher finance charges over the life of the loan.
The VA’s Cash-Out Refinance loan allows qualified veterans — with conventional or VA loans — to refinance to a lower rate while extracting cash from their home’s equity. Essentially, you’re getting a new mortgage at a value higher than what you owe and taking the difference in a cash lump.
The VA and the lender are mostly concerned with making sure you can afford the new mortgage payment. Unlike on a Streamline, the VA mandates that borrowers pursuing a cash-out refinance loan submit to the standard credit and underwriting process. The loan processing for a cash-out refinance is basically identical to the original VA purchase loan, from the income verification and debt-to-income ratio to a home appraisal.
Veterans who want a cash-out refinance pay a higher VA Funding Fee than their Streamline counterparts. As of January 1, 2020, the fee for a first refinance is 2.30 percent of the loan amount for regular military, Reserves and National Guard members. The fee jumps to 3.6 percent for each subsequent refinance.
A Cash-Out Refinance shouldn’t be confused with a home equity loan, which is a second loan that runs alongside your current mortgage. A refinance loan replaces that existing mortgage instead of complementing it.
Depending on rates, a home equity loan may actually be a better option for some veterans. These come with minimal, if any, closing costs but tend to have higher rates than what you’ll find with a VA cash-out refinance. The key is to keep a close eye on rates and shop comparatively.
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