VA Loan Refinance: Which One's Right for You?

A VA loan refinance usually falls into one of two categories: as easy as any other mortgage refinance, or even easier. Which group yours falls into depends on whether you need to walk away from your refinance with some cash in your pocket, or whether you just want a better mortgage rate and a lower monthly payment.

VA Cash-out Refinance

A cash-out refinance involves replacing your current mortgage with a larger one, and taking the difference (less costs) in cash, which you can spend on anything you like. This is one way of cashing in some of your equity, which is the amount your home's value exceeds the balance of any loans against it.

A VA cash-out refinance is pretty much the same as any other, except that, unlike most other home loans, you can borrow against 100 percent of your home's value. So, if your home's appraised value is $170,000 and you owe $140,000 on your mortgage, you should normally be able to walk away with $30,000 (minus any refinancing costs).

Because a VA loan refinance is a whole new mortgage, the paperwork burden is likely to be similar to the one you experienced first time round. You'll also have to meet similar eligibility criteria. In addition to furnishing your Certificate of Eligibility, you'll need to document your income and assets. Your credit history and employment will be checked, and your property will be appraised.

VA Streamline Refinance for Lower Rates

The VA Streamline Refinance program, which is officially called the Interest Rate Reduction Refinance Loan, or IRRRL, is an excellent way to take advantage of today's ultra-low mortgage rates if you have zero or even negative equity in your home. No appraisal is required, and your VA funding fee and other costs are lower. While you can wrap your closing costs into the new loan, you are not allowed to take any cash out at the same time. You can, however, increase your loan by up to $6,000 to cover eligible energy-related improvements (this is called an EEM, or energy efficient mortgage). When adding the cost of energy efficient improvements to an IRRRL, if the monthly PITI (principal, interest, taxes and insurance) for the new loan exceeds the PITI of the loan being refinanced by 20 percent or more, the lender must certify that you can afford the higher payment.

IRRRLs are only available when the new mortgage rate is lower than the existing one, with one exception: you're allowed to refinance at a higher rate from an adjustable-rate mortgage (ARM) to a fixed-rate loan. You may get one even if the home being refinanced is no longer your main residence, providing you attest that it once was.

For IRRRLs, the VA doesn't require you to show your Certificate of Eligibility again, or to have a new appraisal of your home, or to undergo new credit checks, or to prove that you can afford the loan. However, some lenders may insist on some or all of these things.

You are not required to refinance with your current lender. In fact, you should shop around for the best mortgage rate anyway. As the VA says on its website, "Veterans are strongly urged to contact several lenders because terms may vary."

IRRRLs are possibly the easiest type of any form of mortgage to close. If you're eligible, and would benefit from lower rates and monthly payments, they're a no-brainer.

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