VA Mortgage Refinance: What Are Your Options?

If you’re in the military, a veteran, or your spouse is eligible, refinancing your current mortgage into a VA loan can benefit you. Luckily, it’s not too hard to meet the requirements to refinance your mortgage into a VA loan, as long as you meet the military service requirement and lender requirements. Read to know more about VA mortgage refinance. 

What is VA mortgage refinance? 

The Department of Veterans Affairs backs a VA mortgage refinance. It lets you get a new home loan with different terms than the one you already have. You may be able to acquire a cheaper interest rate, adjust the loan duration, or convert your home equity into cash, depending on the type of loan you choose. But VA mortgage refinance is not the same as conventional mortgage refinance. 

The minimum credit score required for a VA loan may be slightly lower than any traditional loan. Usually, the interest rate is also more competitive. Also, with most conventional loans, you have to get private mortgage insurance (PMI) if you have less than 20% of the home’s value in equity. With a VA loan, you don’t have to get PMI. A VA loan, on the other hand, has a funding fee that you won’t get with other loans. 

Who qualifies for a VA mortgage refinance? 

VA mortgage refinances are available to people who are in the U.S. military. To qualify for a VA mortgage refinance, you’ll need the following: 

• Service 

You can usually get a VA home loan after 90 days of active duty during a named conflict or 181 days of active duty in a row during times of peace. Or six years of service in the National Guard or Reserves. If you are a veteran, you must have been discharged with honor unless you fall into one of the other categories. You may also be able to get a VA loan if you were a spouse of a veteran who passed away in the line of duty or because of a disability caused by their service. 

• Income 

Borrowers also need to show that they make enough money to repay their loans, but the requirements are usually easier to meet than those for conventional mortgages. You’ll also need a debt-to-income (DTI) ratio that meets the lender’s standards. Usually, this is 41% or less, but some lenders have more flexible DTI rules. 

• Credit score 

The VA doesn’t have minimum requirements for credit scores. But in general, you’ll require a credit score of 620 for a VA loan refinance. The only exception is the Interest Rate Reduction Refinance Loan, or IRRRL, which doesn’t need underwriting. Some lenders have “overlays” that make their requirements stricter and may ask for a higher credit score. 

• Other Criteria 

To acquire a VA home loan, you need a Certificate of Eligibility (COE) that shows you served in the military. You must also agree to live in the house as your main home. 

What are the pros of refinancing with a VA loan? 

VA loans come with many perks, which is why they are so popular among people who can get them. VA loans don’t need a down payment, but FHA loans, backed by the government, need at least 3.5%. But you’ll still need to be ready to pay closing costs when you refinance. Here are some advantages of refinancing with a VA loan:  

• No mortgage insurance requirement 

Even if there is no down payment, the borrower of a VA home loan does not have to pay mortgage insurance on top of the monthly mortgage payment. 

• Minimal upfront costs 

With VA loans, the borrower usually pays a funding fee upfront, which can be added to the closing costs when refinancing. If you choose this option, you’ll pay for these costs over time, costing you more in interest. You don’t need to make payments for the funding fee if you have a service-related disability and meet certain criteria or if you were married to a veteran who died in service or because of a disability caused by service. 

• Save on interest 

VA home loan rates tend to be competitive and are often lower than what you could get with a regular refinance. Get an approximate to see how much you could save. Even with a lower rate, some homeowners pay more interest when refinancing and changing the loan term. 

• Flexible qualification criteria 

The credit and income requirements for a VA loan are less strict, which makes it easier to qualify.  

• No prepayment penalties

With a VA loan, you don’t have to worry about extra fees if you want to pay off your home early.  

Also, if you currently have an adjustable-rate loan, you can swap to a VA fixed-rate mortgage for a predictable monthly payment. 

How to refinance into a VA loan 

When you decide to refinance into a VA loan, you have mainly two options:  

VA Interest Rate Reduction Refinance Loan (IRRRL) 

A VA streamline refinance, also known as an IRRRL, allows you to refinance irrespective of your financial status or property value. This may result in a reduced interest rate and a lower monthly payment.  

Even if the home you’re refinancing is no longer your primary residence, you can use an IRRRL. You can also utilize this loan to catch up on past-due payments and late fees, but if you’re more than 30 days behind, credit underwriting will be necessary to demonstrate that you can afford the new loan. 

Requirements 

• Requires refinancing of an existing VA loan 
• You cannot extend your current loan term by more than ten years. 
• The borrower must have already lived in the house. 

Pros 

• A simple application with no income verification or evaluation is accepted. 
• Closing costs could be reduced if the lender does not demand underwriting and appraisal. 
• May be utilized as a second house or an investment property. 
• It is possible to refinance with negative home equity. 

Cons 

• The VA funding fee is 0.5%. 
• There will be no cash-out. 
• You must go through underwriting if your payment increases by 20% or more. 

VA Cash-out Refinance 

A VA cash-out refinance you to withdraw funds from your home equity on either a VA or non-VA loan. If you’re eligible for a VA loan, you can simply refinance a non-VA loan into a VA loan. A VA cash-out refinance from a traditional cash-out refinance in requiring less home equity to qualify. 

When you refinance your house with a conventional mortgage, you must keep at least 20% of your equity and can borrow up to 80% of the home’s worth. A VA cash-out refinance you to borrow up to 100% of the value of your property. 

Requirements 

• The borrower must have adequate VA entitlement to qualify for the loan. 
• After closing, you must live in the house as your principal residence. 
• To qualify, you must have sufficient credit and money. 

Pros 

• Refinance either a VA or a non-VA loan 
• Even if your mortgage is past due, you can refinance. 
• Borrow up to 100% of the value of your property. 
• Take cash out to pay off debt, go to school, or repair or upgrade your home. 

Cons 

• Complete underwriting is necessary. 
• Complete evaluation is required. 
• 2.3% VA funding charge (for the first time); 3.6% financing fee (subsequent use) 
• Lender standards could be more stringent than VA requirements. 

Costs of VA refinancing 

The interest rate is only one of the costs associated with your refinance loan. In some situations, you’ll also have to pay closing costs, which may include a VA funding fee. Closing expenses are typically 2% to 5% of the loan amount. Particular fees vary by lender, but these are some typical ones to expect: 

Funding fee: It varies between 0.5% and 3.6%, depending on the type of loan and if you’ve previously used your VA benefit. 

Discount points: They are pre-paid interest; one point represents 1% of the loan amount. 

Origination fee: It is the fee the lender charges for making your loan. 

Appraisal fee: It applies solely to cash-out refinances. 

Title services: These include title searches, title insurance, and loan and deed registration fees. 

Escrow reserves: They are funds set aside to cover anticipated homeowners’ insurance and property tax obligations. 

It’s worth noting that there is no such thing as a refinance loan with no closing expenses. Lenders who make that claim just raise the interest rate to meet the costs or roll the fees into the loan, increasing the amount you borrow — and the amount of interest you pay over the loan’s life. 

Which VA refinancing option is best for you? 

When choosing a VA refinance option, consider what kind of loan would work best for you. In some circumstances, such as owing more than the value of your property or being unemployed, an IRRRL may be your best bet. If you have an option, choose the best rate that will save you the most money. 

Existing VA borrowers who want a lower interest rate or a shorter loan term with no underwriting or appraisal can opt for the VA streamline refinance (IRRRL). Cash-out refinances with the VA work best for homeowners who want to borrow against their home equity or refinance a non-VA loan. 

Bottomline 

If you have a VA loan or a conventional mortgage currently and wish to refinance into a VA loan for better rates and terms, a VA loan calculator will help you calculate how much your new mortgage payment will be. Additionally, compare rates and conditions across several lenders because loan providers, not the federal government or the VA, ultimately decide the prices and terms of these loans. 

FAQs

Should I refinance into a VA loan? 

Most financial experts agree that a VA refinance is beneficial if you can pay your closing expenses within 24 to 36 months. This is relevant if you want to stay in the property for at least five years.

Does VA do refinance loans? 

Yes. The VA will guarantee loans up to 100% of the value of your property. A cash-out refinance loan backed by the VA allows you to swap your current loan with a new one with alternative terms. A VA-backed cash-out refinance loan may be perfect if you wish to take cash out of your home equity or else refinance a non-VA loan into a VA-backed loan.

How do I refinance my VA loan? 

• Locate a lender. 
• Get a Certificate of Eligibility (COE). 
• Provide any necessary information to your lender. 
• Follow your lender’s loan closing process and pay your closing charges.

 Is it cheaper to refinance with a VA loan? 

Yes, it is. You’ll most likely get a cheaper interest rate and lower closing expenses than you would with alternative refinancing options. Also, if you refinance into a VA loan, you will not be required to pay mortgage insurance. In fact, you might not even need to make a down payment. 

What is the current VA loan refinance rate? 

As of March 2023, the average national interest rate on a 30-year VA mortgage is 6.14%, and the average interest rate for a 30-year VA refinance is now 6.25%. 

If you wish to save on your monthly payments, try refinancing. With Way.com, you get the best refinance options. Use our refinance loan calculator, compare the loan rates, prequalify, and save up to $1850 a year on your refinanced auto loan!