US military servicemembers and veterans may already be familiar with how a VA loan can help them buy a house, but another potential benefit is the VA loan refinance. Refinancing with a VA loan can help borrowers lower their monthly payments, reduce their interest rates, or convert some of their home equity to cash. Here are the most important points servicemembers should know about the VA refinance.
VA Loan Refinance
Refinancing a VA loan works on the same principle as a VA purchase mortgage. The loan is made by private lenders but is backed by a guarantee from the Veterans Administration. In a sense, this gives borrowers the best of both worlds -- they have the flexibility to shop around for the best deal they can find, but they have the backing of the United States government to help make the loan available. By guaranteeing these loans, the VA makes lenders more willing to offer them and improves the terms which borrowers get on their loans.
There are a variety of reasons someone with a VA loan might want to take advantage of the opportunity to refinance. Fluctuations in interest rates can make loans cheaper than when the borrower first purchased a home, and they can also make it advantageous to switch from an adjustable-rate to a fixed-rate mortgage. Restructuring the remaining repayment period can make monthly payments more affordable, while borrowing more than the remaining amount owed can make cash available for home remodeling or other projects.
A complete list of eligibility requirements is available on the VA Website, but the qualification process is somewhat simplified when it comes to refinancing an existing VA loan. If a person originally qualified for a VA purchase loan, then chances are that person is eligible to refinance with a VA loan.
VA Interest Rate Reduction Refinance Loan (IRRRL)
An interest rate reduction refinance loan, or IRRRL, is perhaps the most straightforward form of refinancing. Because the VA already guarantees the existing mortgage, it doesn't need to put the borrower through a rigorous underwriting process. The IRRRL must improve the financial position of the borrower, by lowering the monthly payment or reducing the amount of interest paid over the life of the loan. An IRRRL can also be used to switch from an adjustable-rate to a fixed-rate mortgage, which stabilizes the monthly payments over the life of a loan.
Unlike other VA home loans, the IRRRL program doesn't require that the borrower occupy the home as a primary residence -- only certify that the property was previously occupied as a primary home. As advantageous as lowering an interest rate may seem, borrowers should understand that there are costs involved with any home refinance. One such cost is the VA funding fee (typically .5 percent), which functions like mortgage insurance, reimbursing the lender if the borrower defaults.
VA Streamline Refinance
Borrowers may sometimes hear an IRRRL referred to as a VA streamline refinance, because some of the approval procedures are relaxed as long as certain conditions are met. For example, VA streamline refinance means one VA loan is being refinanced with another VA loan; no other form of debt can be refinanced under these circumstances. Also, the new loan must provide a "net tangible benefit," meaning it improves the financial position of the borrower. Finally, cash-out refinancing is not allowed under the IRRRL program.
If the VA streamline refinance requirements are met, no appraisal or underwriting hurdles need to be cleared for the new loan. The borrower does not need to obtain a new Certificate of Eligibility, but instead can simply use the Certificate of Eligibility from the existing loan. The borrower can choose to pay the costs of refinancing out-of-pocket or add them to the new loan balance.
VA Cash Out Refinance
Cash-out refinancing means that the borrower refinances an existing mortgage but borrows additional cash. After the existing mortgage has been paid off by the new loan, there is money left over which is paid to the borrower. The VA allows cash-out refinancing to an extremely generous 100 percent of the property value. Most programs, including FHA loans, don't allow cash-out refinancing to exceed an 85 percent loan-to-value ratio.
A VA cash out refinance can be used for a variety of purposes. It can fund projects for the house itself, such as repairs or upgrades, but it is not limited to home improvement. Cash-out refinancing can be a cost-effective way of paying off other forms of debt, such as credit card debt, and it can also help a homeowner cover educational expenses.
An Important Message from the VA
While no lender is required to provide an IRRRL, borrowers can apply for and close an IRRRL with any VA-approved mortgage lender. Homeowners do not have to work with their current lender unless they want to. In addition, the VA warns homeowners that the government does not set interest rates for VA mortgages. It's up to the borrower to compare rates and terms from competing lenders and choose the best deal.
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