When rates are low, many homeowners start seriously considering the benefits of a refinance. Depending on your circumstances, you could lower your monthly payment significantly, take out cash to make home improvements, or both.
But how much does a refinance really cost? And how can you tell if it’s the right move for you right now?
The VA has two refinance products to consider.
Let’s take a brief look at each and then jump into some additional questions and considerations.
The Interest Rate Reduction Refinance Loan (IRRRL) is a refinance product aimed at lowering the interest rate on an existing VA loan. It’s also an excellent vehicle for Veterans who want to get out of an adjustable-rate VA mortgage. The IRRRL (also known as a VA Streamline) is open only to homeowners with current VA loans.
Since these almost always result in a lower monthly payment, some lenders forego income and asset verification, which can lower closing costs.
The IRRRL program allows borrowers to finance the costs of refinancing into the loan, including up to 2 discount points. Guidelines on maximum loan-to-value ratio may vary by lender.
Potential IRRRL closing costs might include:
Some lenders may charge an origination fee or other fees to cover their costs, while others might not.
The VA’s Cash-Out refinance allows homeowners to extract cash from their home’s equity. Veterans with non-VA loans can also refinance into the VA program using this option, and they aren’t required to take out cash.
Potential VA Cash-Out closing costs might include:
As with VA Streamlines, costs and fees can vary by lender and other factors.
If you’re working with a lender offering a “no closing fee” refinance, pay close attention.
Sometimes “no closing costs” translates to “hidden closing costs.” When that’s the case, you’ll end up paying these fees over the life of the loan, either because your lender has used a higher rate to cover costs, or because they have simply been rolled into your new loan.
That being said, it is possible to find lenders who offer very low or even no-cost IRRRLs, usually available only to returning customers. Due diligence is essential to be sure you have a full understanding of what you’re being charged in either case.
Always read the fine print before signing any loan documents.
If you’re on the fence about refinancing, a simple calculation can help you determine how long it will take you to recuperate your closing costs.
What does that look like in practice? Let’s check out an example:
You’re interested in refinancing your mortgage to change your interest rate from 4.25 percent to 3 percent. Your lender estimates that your total closing costs will be $3000. With the new rate, your monthly payment will go down by $150 a month.
To calculate the time to recuperate your costs, simply divide the total closing costs by the monthly savings: $3,000 / $150 = 20
In 20 months, you will have recovered from the costs of refinancing, and your monthly payment reduction represents cost savings for the remainder of your mortgage term.
VA IRRRL rules require borrowers to recuperate the costs of refinancing within 36 months of closing. The 36-month metric is a good rule of thumb when considering other refinance products as well.
When you’re shopping for a refinance, more than likely, you’ll focus on comparing interest rates between lenders. Interest rates are vital—they will determine how much you pay for financing over the life of your loan. But other factors come into play when choosing a VA refinance lender, particularly closing costs and loan product expertise.
Different lenders have different fees, so it’s well worth your time to compare loan estimates from several lenders side-by-side. Keep your eye on origination fees and other costs that the lender charges.
Lenders don’t set costs associated with third-party services like title work and appraisal fees. You can shop around for appraisers and title companies to possibly lower these costs.
In addition, choosing a lender that knows their way around the VA loan program can save you from headaches along the way.
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