Dropping Rates Drive Big Savings for Veterans

VA loan refinance options could change depending on what your goals are.

Imagine this: You buy a brand-new car, and the moment you drive it off the lot, its value drops significantly.

Now, wouldn’t it be fantastic if you could return that car and then buy it back the next day at a reduced price?

While this scenario might seem like a fantasy in the car world, it is a reality for homeowners using the VA loan refinance options.

For homeowners with a Department of Veterans Affairs (VA) mortgage loan, the VA offers two primary refinance options: the Interest Rate Reduction Refinance Loan (IRRRL) and the Cash-Out (Streamline) Refinance.

These refinancing options provide significant benefits for veterans, active-duty service members, and qualifying surviving spouses, including potentially lower interest rates, better loan terms, and the ability to tap into home equity.

What is a VA Cash-Out Refinance?

A VA Cash-Out Refinance allows eligible veterans and service members to refinance their current mortgage for up to 100% of the appraised value of their home.

This option can be used to pay off liens, consolidate debt, make home improvements, or simply have extra cash on hand. It also allows the refinancing of a non-VA loan into a VA loan, often with more favorable terms.

How Does a VA Cash-Out Refinance Work?

Since VA loans are backed by the federal government, they present a lower overall risk to lenders, leading to more favorable loan terms for borrowers.

The VA Cash-Out Refinance process involves researching VA lenders, reviewing loan conditions, selecting a financial institution, and submitting a loan application. The costs include closing costs and a VA funding fee, which can be rolled into the loan.

What is a VA Interest Rate Reduction Refinance Loan (IRRRL)?

The VA IRRRL, or “Earl” as it’s often called, is a powerful refinancing option available exclusively to Veterans who own homes with VA loans.

This special benefit allows Veterans to always take advantage of the best market rates as long as they can lower their interest rate by at least half a percent and it benefits them financially.

How Does a VA IRRRL Work?

The IRRRL process is simpler than traditional refinancing. Borrowers can roll closing costs into the loan amount and are typically not required to provide an appraisal or meet credit score requirements.

The primary benefit is the ability to reduce monthly mortgage payments through a lower interest rate.

Key Differences Between the VA Loan Refinance Options

• Primary Purpose: The IRRRL is for lowering interest rates or switching from an ARM to a fixed-rate mortgage, while the Cash-Out Refinance allows tapping into home equity.
• Eligibility: The IRRRL is only available to current VA loan holders, whereas the Cash-Out Refinance can be used for conventional loans as well.
• Property Type: The IRRRL can be used for any residence previously occupied, whereas the Cash-Out Refinance must be for a primary residence.

Eligibility Requirements for VA Mortgage Refinancing

To qualify for a VA mortgage refinance, applicants must meet specific service requirements. These include active-duty service, National Guard or Reserve service, or being a surviving spouse of a service member who died in the line of duty.

A Certificate of Eligibility (COE) is required, along with meeting lender-specific credit score and debt-to-income ratio criteria.

Benefits of Refinancing with a VA Loan

• Lower Interest Rates: VA loan rates are typically lower than conventional loans.
• No Mortgage Insurance: VA loans do not require mortgage insurance, even with no down payment.
• Flexible Credit and Income Criteria: Easier qualification compared to conventional loans.
• No Prepayment Penalties: Borrowers can pay off the loan early without penalties.
• Minimal Upfront Costs: Lower funding fees and the ability to roll costs into the loan.

How to Apply for a VA Mortgage Refinance

The application process for both the IRRRL and Cash-Out Refinance involves selecting a VA-approved lender, reviewing loan terms, and submitting an application.

For the IRRRL, the process is more streamlined with fewer requirements. For the Cash-Out Refinance, a more traditional loan process is followed, including a home appraisal and meeting credit score benchmarks.

Pros and Cons of VA Mortgage Refinancing

Pros

• Lower interest rates than conventional refinances
• Ability to use funds for various financial needs
• Easier qualification criteria

Cons

• Funding fee requirements
• Closing costs
• Potential risk if home value decreases

Alternatives to VA Mortgage Refinancing

• Conventional Cash-Out Refinance: Higher interest rates and more stringent requirements but no military service required. Read more about this product here.
• Home Equity Loans and HELOCs: Fixed-rate loans or lines of credit that allow tapping into home equity but are not backed by the VA.

Refinancing a mortgage through the VA loan program can be a smart financial move for eligible veterans, service members, and their families.

Whether opting for a VA Cash-Out Refinance to access home equity or a VA Streamline Refinance to secure a lower interest rate, these options offer significant benefits.

It’s essential to understand the eligibility requirements, benefits, and potential drawbacks to make an informed decision that aligns with your financial goals.

FAQ for VA Mortgage Refinancing Options

What is a VA Cash-Out Refinance?

A VA Cash-Out Refinance allows eligible veterans and service members to refinance their mortgage for up to 100% of the appraised value of their home. It can be used to pay off debt, make home improvements, or simply have extra cash.

What is a VA Streamline Refinance (IRRRL)?

The VA Streamline Refinance, or IRRRL, is designed for current VA loan holders to secure a lower interest rate or switch from an adjustable-rate mortgage (ARM) to a fixed-rate loan with minimal paperwork.

Who is eligible for the VA loan refinance options?

Eligibility requires meeting specific service requirements, such as active-duty service, National Guard or Reserve service, or being a surviving spouse of a service member. A Certificate of Eligibility (COE) is also needed.

What are the benefits of a VA Cash-Out Refinance?

• Lower interest rates
• Access to home equity
• Ability to consolidate debt
• Potential for better loan terms compared to conventional loans

What are the benefits of a VA Streamline Refinance?

• Lower interest rates
• No need for an appraisal or meeting credit score requirements
• Minimal upfront costs

What are the main differences between VA Cash-Out Refinance and IRRRL?

• Purpose: IRRRL is for lowering interest rates or switching from an ARM to a fixed-rate mortgage; Cash-Out Refinance is for tapping into home equity.
• Eligibility: IRRRL is for current VA loan holders; Cash-Out Refinance can be used for conventional loans as well.
• Property Type: IRRRL can be used for any residence previously occupied; Cash-Out Refinance must be for a primary residence.

What are the typical costs associated with the VA loan refinance options?

• VA Funding Fee: This fee varies depending on the type of refinance and whether it’s your first VA loan. It can often be rolled into the loan.
• Closing Costs: These include lender fees and can sometimes be rolled into the loan amount.

How do you apply for a VA mortgage refinance?

Select a VA-approved lender, review loan terms, and submit an application. For the IRRRL, the process is more streamlined with fewer requirements. For the Cash-Out Refinance, a more traditional loan process is followed, including a home appraisal and meeting credit score benchmarks.

Can you refinance a non-VA loan into a VA loan?

Yes, with a VA Cash-Out Refinance, you can refinance a conventional mortgage into a VA loan. Potentially benefitting from better loan terms and the ability to access home equity.

Are there alternatives to the VA loan refinance options?

Yes, alternatives include conventional cash-out refinancing, home equity loans, and home equity lines of credit (HELOCs).

Should you refinance into a VA loan?

It depends on your financial situation and goals. VA loans offer lower interest rates, no mortgage insurance, and flexible credit and income criteria. This makes them an attractive option for eligible veterans and service members.