VA Loans
Guide to the VA Funding Fee Exemption
A VA mortgage can be refinanced in two ways: an option to lower interest rates or cash out. Both options offer very competitive VA refinance rates. According to the January 2017 edition of Ellie Mae’s Origination Insight Report, the U.S. Department of Veteran Affairs has been offering lower rates on new mortgages and refinancing options for well over a year. While each option shares the same low rate benefit, each offering is very different from each other. It’s important to carefully choose which type is best for you financially.
Formally known as an Interest Rate Reduction Refinance Loan (IRRRL – pronounced like “earl”), this option is a wonderfully easy and cheap way to refinance to a lower mortgage rate. Practically anyone can qualify for an IRRRL, as homeowners who owe more on their mortgage than the appraised value of their home have qualified, as well as with homeowners with bad credit. You can also use this option to switch to a 15-year mortgage from a 30-year one and change the interest rate from adjustable to fixed. One downside to opting for the VA streamline refinance program is that you won’t be able to walk away with cash in your pockets. However, this is likely going to be the best option if you’re looking to lower the interest rate on your mortgage.
Before you choose this option, you will want to make sure that you are eligible. There are three main conditions attached to IRRRLs:
The VA IRRRL provides one of the easiest (and often cheapest) refinancing processes currently available. Since you’re refinancing an existing VA loan, you won’t need to jump through many hoops. Your credit won’t be checked and your home won’t be appraised. This will allow you to move forward even if your home is underwater. Closing costs may typically be lower than with other refinancing options, and the costs that do come with this program can be rolled up into your new loan, so you can potentially refinance without funding a cent upfront. You won’t have to show your VA certificate of eligibility to your lender to get new rates through this program, even though your lender might appreciate it if you did.
Given that you can’t take out cash with an IRRRL, the only reason you’re likely to want to refinance is to lower your monthly mortgage payments. This normally means you’ll want to refinance to a lower rate, but there is an exception.
An adjustable-rate mortgage (ARM) usually comes with a lower interest rate than a fixed-rate mortgage (FRM), at least in the beginning. There’s typically an initial fixed-rate period when the rates are very low and then it floats up, or sometimes down.
Over the last few years, interest rates have generally stayed ultra-low, but they’ve recently begun to rise. It’s possible that they’ll carry on upward, perhaps to a level where they’ll make homeowners with ARMs financially stressed.
Having said that, most ARMs allow only one rate hike annually, and have one or more of the three following caps on increases:
You can check your ARM loan agreement to see which, if any, caps apply to your mortgage. Then, you can understand your exposure by modeling different scenarios using the LendingTree mortgage calculators..
Still, if your budget is tight, even limited rises could cause you real headaches, making a fixed rate refinance an attractive option that can put a lock on your monthly payments for the life of the mortgage.
Refinancing your adjustable rate mortgage to a fixed rate mortgage will probably bring some short-term pain. Fixed rate mortgages typically have higher mortgage rates than ARMs, so your monthly payments will likely rise. However, doing so will remove risk in the future. Instead of getting stressed if rates rise sharply, you can sail on, serenely knowing yours is fixed.
You could consider refinancing your ARM into another ARM. You could switch to an option with a three-, five-, or seven-year (or a bit longer or shorter) initial period during which your rate will be fixed at a level that’s almost certain to be lower than any fixed rate mortgage you could get.
That may seem like kicking a can down the road, but if your finances are really tight right now, you may have no choice but to go ahead and kick that can – no matter what the risks. You may experience more financial pain after the fixed-rate period is up if interest rates rise, or you could be smoothly sailing if they dip or stay the same. Truth be told, nobody’s sure that interest rates will rise significantly and, let’s face it, experts have been wrongly predicting imminent hikes for the better part of the last decade.
Do you remember how many homeowners used to use their homes as personal ATMs before the credit crunch and Great Recession? They would refinance whenever they needed cash to enjoy an otherwise unsustainable lifestyle.In the long term, that’s not a good financial strategy. Every time you refinance, you reset the clock on your mortgage, usually starting a 30-year term all over again. If you keep doing that, you could find yourself making mortgage payments until your dying day. Also, each refinance brings new closing costs that eventually have to be paid down.
However, there’s nothing wrong with occasionally using a VA cash-out refinance as a tactic within a thought-through financial strategy. That’s especially true if you’re improving your finances because you want to consolidate debt or grow your business. It can also be useful if you need money for something that’s important to you, but less “virtuous” for your personal economy – such as your or an offspring’s wedding or college fund.
Over the years, you may have built up “equity” (the amount by which the current appraised value of your home exceeds your current mortgage balance) in your home in two main ways:
A typical cash-out refinance will let you access only some of that equity. A VA cash-out refinance, however, often lets you get your hands on 100 percent of your money as long as the amount does not exceed your property’s value.
For example, if your home was appraised at $200,000, you have a remaining mortgage balance of $150,000, and closing costs from the refinance come out to $5,000, you’ll be able to take home $45,000 if you choose to cash out 100 percent of your home’s equity. Of course, you don’t have to take out all your equity and, if you’ve any choice, it’s probably better over the long term not to do so. However, it’s there if you need it.
Unlike an IRRRL, you’re going to be changing the terms of your mortgage, so you’re pretty much going to be starting over. In fact, your existing mortgage doesn’t even have to be a VA loan for you to execute a VA cash-out refinance. However, that fundamental change means that you may be asked for your veteran’s certificate of eligibility. It also means that this refinance option is available on the same basis as an original VA purchase loan.
The VA has caps on the amount it will guarantee on any one loan. In theory, you can borrow more, but, in practice, very few lenders will breach those caps. In 2017, VA loan limits are $424,100 for a one-unit home in most areas, but it could be higher if you want to buy in an area designated as one with high home prices.
The loan process for a VA cash-out refinance is very similar to that of a VA purchase mortgage. You’ll need:
You won’t be able to roll up your closing costs into the new loan like you can with an IRRRL. However, you can normally pay them from the cash you take out.
It typically takes a few extra days to close on a VA cash-out refinance compared to other types of refinance programs. Ellie Mae reported that the average closing time was 58 days in January 2017, five days longer than the average refinance overall.
You don’t have to refinance to a mortgage that is similar to the one you have. You can use this as an opportunity to get a different loan option that suits you best.
Just as with an IRRRL, you can switch from an ARM to an FRM – or, more rarely, the other way around. You can also choose a different term. If you can afford the higher monthly payments, changing to a 15-year mortgage from a 30-year mortgage can save you serious money in the end.
No matter what their rhetoric, not all mortgage brokers and lenders appreciate your service. Some actively target those eligible for VA loans with deals that cost you money so that they can pocket it.
Always check current VA refinance rates and get a number of quotes from multiple lenders before you commit to an IRRRL or VA cash-out refinance.