Mortgage refinance rates are near all-time lows, and refinancing activity has been off the charts over the past year or so. If you have a VA loan with an interest rate that's significantly higher than today's mortgage rates, you might be wondering if you can refinance your mortgage to take advantage.
With that in mind, here's what you need to know about refinancing VA loans. We'll dive into the various options, and the next steps to take if you think refinancing your VA mortgage is right for you.
Can you refinance a VA mortgage loan?
Yes. VA home loan borrowers can refinance their mortgages to take advantage of lower interest rates, extend or shorten their repayment term, pull cash out of their home equity, or some combination of these reasons.
To refinance a VA loan, borrowers can either use one of the VA's refinancing options (which we'll discuss a little later) or they can use a different type of loan to refinance.
In other words: It's usually a good idea to use VA refinance options, but you can refinance a VA loan by using a conventional mortgage if you prefer.
How to refinance a VA home loan
There are four basic steps to refinancing a VA home loan.
Find lenders that offer VA loans
The VA doesn't make home loans directly, so you'll need to find a private lender. The smartest thing to do is to check out some of the best refinance lenders and complete the pre-approval process with a few to compare interest rates and loan costs.
Decide on the best type of loan for you
Do you simply want to lower your monthly payment, or do you want to take cash out of your home?
And is refinancing with another VA home loan the best way to go?
Before you refinance, look at the types of loans available to you to find the best options. As we'll see below, there are two distinct types of VA refinance loan, or you can choose to use a conventional mortgage to refinance if desired.
Gather the required documentation
Once you've decided on a lender and a loan type, the next step will be to formally apply for the refinancing loan. After submitting your application (if you've already been pre-approved, this should be easy), your lender will request documentation on your income, employment, assets, and other relevant information.
If you're refinancing with a new VA loan, you'll need to show your Certificate of Eligibility.
Schedule your closing and pay your fees
A few steps need to happen between application and closing. For example, if you're doing a cash-out refinancing, your lender will almost certainly order an appraisal. So, the final step is to follow all of your lender's closing procedures, schedule a closing date, and pay whatever closing costs your loan requires. With VA loans, this likely includes the VA funding fee and some other closing costs (more on these later).
VA refinance loan types
As mentioned, you can refinance a VA loan with another VA loan, or you can use another type of mortgage loan, such as a conventional loan or FHA mortgage. But using one of the VA refinancing loan options is typically the most advantageous way to go, if you qualify.
There are two VA loan refinancing options: the VA streamline refinance or the VA cash-out refinance. Here are some important details about both.
VA streamline refinance
The VA streamline refinance is also known as the Interest Rate Reduction Refinance Loan (IRRRL). It's designed to provide a quick and easy way for borrowers with existing VA loans to take advantage of lower VA loan rates, or to switch from an adjustable-rate mortgage to a fixed-rate loan.
To qualify for the VA streamline refinance loan, you'll need to meet the following qualifications:
- Your existing mortgage must be a VA home loan
- The new loan must be used to refinance the existing loan
- The home is (or used to be) your primary residence
VA cash-out refinance
In addition to lowering their interest rate, the other common reason borrowers refinance their mortgages is to take cash out of their home.
In other words, if you owe $200,000 on a home that is worth $400,000, you could obtain a new mortgage for $300,000 and receive $100,000 back at closing. You could use this to make home improvements, finance a large purchase, or for any other reason. For these situations, there is a VA-backed cash-out refinance loan.
One thing to be aware of is that the IRRRL is a streamlined loan, but the cash-out refinance loan is not. You'll have to produce significantly more documentation for a cash-out refinance, particularly when it comes to income and assets. Additionally, the lender will require an appraisal of the property. You'll also need to meet the credit standards set by the VA as well as your particular lender.
VA loan refinance fees
Refinancing isn't free. While VA loans (including refinancing loans) can have a cheaper cost structure than conventional and FHA loans in many cases, there are still some costs of refinancing to be aware of.
The biggest cost you're likely to face is the VA funding fee, which most (but not all) borrowers will have to pay. There are a few exceptions -- for example, if you're an active duty service member who is a Purple Heart recipient, you're exempt. But unless you qualify for an exemption, the VA funding fee ranges from 0.5%-3.6% depending on the type of loan, your down payment, and other information.
Cash-out refinances have a set VA funding fee of 2.3% for the first use, or 3.6% for subsequent uses of the program. For VA streamline refinance (IRRRL) loans, the fee is a much lower 0.5%.
In addition to the VA funding fee, you may face other closing costs. This can include discount points paid to your lender to get a lower interest rate, appraisal fees (if required), title insurance, recording fees, and more.
Am I eligible for a VA loan refinance?
Maybe. Eligibility depends on the type of refinancing loan, the property itself, and the borrower's qualifications. If you're not sure if you are eligible for a VA loan refinance, talk to one (or a few) of our favorite VA lenders, who can help answer your questions and point you in the right direction. You can also check out our VA loan guide to go over some details on how VA loans work.
RELATED: Ready to refinance? Check out The Ascent's review of BNC Bank National Mortgage. They specialize in VA loans.
Still have questions?
Here are some other questions we've answered:
- How Soon Can I Refinance My Mortgage?
- How to Refinance With Your Current Lender
- What Are Refinancing Fees? Mortgage Refinancing Costs to Plan For
The Ascent's best mortgage refinance lenders
Refinancing your mortgage could save you hundreds of dollars for your monthly mortgage payment and secure you tens of thousands of dollars in long-term savings. Our experts have reviewed the most popular mortgage refinance companies to find the best options. Some of our experts have even used these lenders themselves to cut their costs.
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