As a military spouse and real estate agent, the last several months have been an absolute whirlwind.
While most industries have been negatively impacted by COVID-19, real estate has continued to boom through the entire United States as interest rates have remained super low. Not only have we seen more people buying homes; they are also refinancing to a lower interest rate to save money on their mortgage payment.
One of the big questions I hear from my customers and military friends is whether or not they should refinance.
This is not an easy question to answer! I’ve consulted with one of my lender partners to help answer this burning question that so many of you have! Ian MacDonald is a mortgage loan originator with Regions Mortgage and has been in the mortgage industry since 2006.
There are currently two types of VA refinance options:
1. Interest Rate Reduction Refinance Loan (IRRRL)
IRRRL is used to refinance one VA mortgage into another to improve your interest rate/lower payment or go from an adjustable-rate loan to a fixed-rate loan. Generally, no appraisal or credit information is needed, and there are reduced underwriting guidelines requirements (hence the term streamline refinance). This allows these loans to refinance with less paperwork and faster closings.
2. VA Cash-Out Refinance
A cash-out refinance is where a Veteran uses their VA entitlement to obtain a VA mortgage to either pay off a non-VA mortgage or refinance an existing VA mortgage to get some cash out of their equity. A Veteran may consider a cash-out refinance over an IRRRL to take some cash out of their property to consolidate debt or to make home improvements. They may also refinance a non-VA mortgage into a VA mortgage for better terms. Given that a VA cash-out refinance allows the Veteran to have a higher loan to value ratio than most conventional mortgages, it provides the Veteran more options than a conventional mortgage.
No matter which option you choose, Ian recommends evaluating the cost associated with the loan and the amount of time it will take for the Veteran to recoup the costs associated with the refinance.
While a lower rate is attractive to look at, it does not always make sense when you consider the costs.
Unless a Veteran is exempt, they will have a funding fee for their loan. The VA website outlines information on the VA funding fee. On a refinance, the amount of the fee will depend on the type of loan the borrower is applying for. For an IRRRL, the funding fee is 0.5% (unless the Veteran is exempt). For a cash-out refinance, it is 2.3% for a Veteran’s first use or 3.6% for a Veteran’s subsequent use. Those percentages are of the base loan amount. That is $500 per $100,000 loan amount for an IRRRL and $2300 or $3300 per $100,000 loan amount on a cash-out refinance.
The amount of closing costs a Veteran will pay in relation to the amount of savings/benefit for a refinance also needs to be considered. When calculating the cost, it’s important to include the VA funding fee into those costs (unless the Veteran is exempt), since that can add significant cost on to the loan and extend the amount of time it takes for a Veteran to earn back the cost of the refinance. Closing costs and the funding fee can be rolled into a VA refinance to limit cash out of pocket, but those are paid through the home’s equity. Depending on how long the borrower will own the property, using equity now to save money can affect their ability to sell when they PCS to their new duty station.
Ian recommends that Veterans work with a trusted loan officer and mortgage lender who will spend the time to evaluate if the refinance makes financial sense for the Veteran. As I said, there are no easy answers – but those professionals can help guide you to make the best decision for you and your family!
Thank you Ian for sharing and shedding light on this very popular topic for the military and Veteran community.
He can help those buying or refinancing in Alabama, Arkansas, Colorado, Florida, Georgia, Iowa, Illinois, Indiana, Kansas, Kentucky, Louisiana, Missouri, Mississippi, North Carolina, Ohio, Oklahoma, South Carolina, Tennessee, Texas, Utah, Virginia, and Washington DC. For more information, you can visit his website here.