VA Mortgage Refinance | Is It The Best Option?

A VA mortgage is a home loan backed by the United States Department of Veterans’ Affairs, as part of their broad package of Veteran benefits.

Other Benefits Include:

• Comprehensive Low-Cost Medical Care
• Education Assistance
• Disability Compensation
• Vocational Rehabilitation
• Employment

THE INITIAL VA MORTGAGE LOAN PROCESS

Securing a VA mortgage affords many advantages to eligible homebuyers. The individual shops around and chooses a lender for their mortgage knowing that the VA will “stand behind” a portion of the loan.

This guarantee from the VA provides lenders with certainty regarding the loan’s payback and minimizes their risk when deciding to approve a mortgage. In turn, this creates extremely favorable terms and rates for potential buyers: limits are established for closing costs and penalty fees, interests remain low, and down payments may be non-existent.

Of course, this entails adhering to a specific buying process when applying for one of these mortgages. Buyers must meet eligibility requirements to receive VA home loans. This goes beyond maintaining an adequate credit score and receiving sufficient income. Obtaining a valid Certificate of Eligibility (COE) is a necessary step in the process.

The COE confirms qualification for the program as well as service time obligations, or in the case of beneficiaries, that certain conditions have been met.

Buyers must also complete the transaction with a lender that participates in the VA program and they must occupy the property as a primary residence.

REFINANCING YOUR VA MORTGAGE

On the other hand, in the case of mortgage refinance, the process is meant to allow qualified borrowers to alter their loan term and, hopefully, lower their interest rate. This can be for the purpose of switching from a variable to a fixed rate, receiving additional funds, or gaining a general decrease in mortgage-related costs.

Typically, this is done by replacing an existing mortgage with a new one with more favorable conditions or by utilizing the home's equity for cash.

While intended for the same goals, VA mortgage refinance is achieved via slightly different processes than traditional home refinancing. Eligible homeowners can opt for one of two types of VA refinancing options, each one satisfying different needs and achieved through different means: the Streamline Refinance Program, also known as Interest Rate Reduction Refinancing Loan (IRRRL), or the Cash-Out Refinance Loan. In both instances, customers are encouraged to shop around and compare different lenders before deciding on a product.

WHAT IS AN INTEREST RATE REDUCTION REFINANCING LOAN?

The IRRRL, rather than generating a new mortgage, alters the existing one. Their purpose is to reduce monthly mortgage costs by lowering interest rates (or moving them from variable rates to fixed ones) with little to no out-of-pocket costs for the homeowner.

As opposed to the original VA loan, an IRRRL can be granted without claiming primary residence as long as there is evidence that it was, at some point, occupied by the borrower. Furthermore, a certificate of eligibility (COE) is not required. In fact, the paperwork for the IRRRL is minimal and an appraisal will not be requested, either.

Regardless of an applicant’s income and credit history, every qualified veteran is entitled to at least $36,000 without a down payment. Though there is no official loan cap, veterans are usually granted an amount up to four times their allotted entitlement.

That said, IRRRL recipients may only use resultant funds for their stated interest-reduction purpose. This means that no cash may be received, and it cannot be used to pay off other loans. If you have another outstanding home loan it must be subordinate, meaning that the VA loan which is being modified must be your primary mortgage. An IRRRL can only be applied to an already existing VA loan and not to a private, non-VA home mortgage.

Not having to pay between 1.25% and 1.75% of the loan’s total in extenuating fees means that veterans are not required to pay out-of-pocket when undergoing the application process. The exception to this is the VA funding fee, a variant of the typical closing cost. This helps to subsidize the VA’s loan guarantee benefit and is calculated based on loan type, loan term, and whether the applicant is a first-timer.

Exceptions are offered, however, to those who are receiving or are entitled to receive, disability-related benefits. 

IRRRL services are only offered by way of licensed lenders specifically approved by the Department of Veterans Affairs. In 2016, there were 303 such entities.

WHAT IS A CASH-OUT REFINANCE LOAN?

Cash-Out Refinance works for homeowners who want to turn their home equity into cash. By refinancing the mortgage for a higher amount than the property owes, borrowers get back funds to use at their discretion. These funds can be used to consolidate debts, make improvements that add value to the home, buy additional property, pay for college, or any other worthwhile venture. 

Another option with cash-out refinancing is converting a non-VA loan into a VA one. Borrowers won’t necessarily receive extra funds under this alternative, but the VA will guarantee loans up to 100% of the home’s value.

Nonetheless, this method of cash-out refinancing requires an appraisal of the home and borrowers will need to qualify based on their income and credit, much like the process in an initial VA mortgage. Moreover, applicable fees are going to be imposed, mainly a funding fee that can be added to the loan balance. 

Even with the considerable benefits a cash-out refinance loan provides, it can have its drawbacks. For starters, many lenders do not offer it. Therefore, when you take into consideration that they must also participate in the VA home loan program, this will substantially limit the number of available lenders that can provide the service.

Additionally, these types of loans have closing costs that will eat away at the cash you’re expecting to receive back. Not to mention the financial hit you could suffer if the value of your property decreases and are left paying the refinanced loan.

In this sense, it is of great importance to understand your financial needs, your housing market, and the available refinancing options for you before deciding if the benefits of this type of loan outweigh its inherent risks. 

After carefully considering all these aspects, we've chosen the best providers for VA mortgage loan refinancing, featured below.