If you are worried about not being able to pay your VA loan following the pandemic, don’t worry you are not alone in this. Thousands of people have reported not being able to pay off their loans as pandemic has challenged their financial position.
To help you overcome this financial stress we have rounded up all the essential information about how a VA refinance can help you lower the interest rates and monthly installments. Before hopping into the details, let's understand what VA refinancing refers to and how you can easily refinance a VA loan.
VA Refinance Definition
Refinancing VA loans is a process through which the VA loan holders can refinance their loan for a new loan having better loan terms. Here it is crucial to understand that, VA refinance is a whole new loan and shouldn’t just be considered an adjustment to the existing VA loan.
For a VA refinance, you will be required to fill out a brand new application. You will have to go through several steps to be eligible for a VA refinance. To approve for a refinance, your lender will assess your current income, debt-to-income ratio, and credit score, once you meet all their requirements, you will be able to refinance your existing VA loan and qualify for a new loan with lenient interest rates and installments.
VA Refinance Benefits
One of the major benefits you can reap from refinancing a VA loan is, you will get rid of the private mortgage insurance. This counts for $30 to $70 per month for every $100,000 you have borrowed. While issuing a VA loan, the lender often charges private mortgage insurance of 20% on the home value. Applying for a refinance will help you get off the private mortgage insurances permanently.
Another perk of applying for a VA refinance is, you will not require going through extensive documentation. The only documents you will be required to present are the ones that prove your creditworthiness, income, and all the liquid assets. Long story short, the documentation process for the VA refinance is short and simple.
One more benefit for such loans is, you will not be asked to provide any appraisal fee.
VA Refinance Types You Can Count On
Following are the options you can consider while refinancing your VA loans.
1. VA Streamline Refinance
VA Streamline Refinance, commonly known as Interest Rate Reduction Refinance Loan or IRRRL, is a refinance option for people who already have a VA mortgage.
It is the best refinancing option for people who are looking for a fixed-rate mortgage to lower their payable interest and monthly installments. This refinance option doesn’t provide the cash-out option.
Once you have refinanced your VA loan to a fixed-rate mortgage from an adjustable-rate mortgage, you will have to pay a lower interest rate.
This refinance option provides you the option to wrap up the closing cost into the new loan. The eligibility requirements for most lenders will also be lenient enough. All you have to make sure is, you haven’t had any late mortgage payments within the last 12 months.
2. VA Cash-Out Refinance Loan
The second option for VA refinance is the cash-out option. If you are a VA or conventional loan holder, you can count on this option. This option will enable you to extract cash from your home equity.
Upon deciding on this refinance option, you can pay off all the closing costs using the cash-out money you are going to get.
This option is the best fit for those who are willing to tap into their home’s equity. If you are among such people thinking about tapping into your home equity, you will be required to refinance your current mortgage into a VA cash-out refinance loan.
To be able to qualify for this type of refinancing, you will require to maintain a good credit score and a VA appraisal. Furthermore, to be eligible for this refinance type, the house must be your primary residence.
Following a VA cash-out refinance loan you can finance up to 100% of your appraised home value. However, the total amount of money can vary from one lender to another.
The major difference between a VA Cash-Out Refinance Loan and VA Streamline Refinance is, in the former, you will be required to pay all the closing costs upfront and that cannot be wrapped into the new loan. Conversely, the VA Streamline Refinance doesn’t require you to pay the closing costs rather it gets wrapped into the new loan.
Do I Need To Pay Any VA Refinance Fee?
Yes, you will incur an extra fee titled VA funding fee, while refinancing VA loans. Well, this isn’t something new as all VA refinance loans generally come with a funding fee.
The fixed percentage of a funding fee applicable on an Interest Rate Reduction Refinance Loan or IRRRL is 0.5% on your loan amount. While for the VA cash-out refinance, you will be charged a funding fee of 2.3% on the loan amount. However, the funding fee for all the subsequent VA loans is 3.6%.
People having a service-related disability, or the surviving spouses of veterans who died in the line of duty will not be charged a funding fee.
Related: Conventional Mortgages Vs Jumbo Loans – What’s The Best Option?
The Takeaway
If any of the above two refinancing types suit you, you can reach any VA lender to apply for a refinance. You can also consult loan officers to determine whether or not refinancing a VA mortgage is a worthy deal.
