If you’re unsatisfied with your home loan, refinancing through the VA could help. Whether you have a high monthly payment, an adjustable interest rate that keeps rising, or other terms you’re unhappy with, there are a number of ways that refinancing through the VA could give you relief.
With the right VA loan program, you could potentially reduce your interest rate and save money on your overall cost of repayment. Alternatively, you could reduce your monthly payment to help balance your budget, or even cash out some of your home equity and use the money for necessities.
Here’s a look at your options for refinancing a VA loan, and what you should be aware of before applying.
What is Refinancing?
Refinancing is the process of taking out a new loan in order to replace an existing loan.
In order to refinance, you’ll have to apply for a new loan and potentially pay closing costs to the lender, even with a VA refinance loan. When you refinance, you’ll likely end up with a new monthly payment amount and a different interest rate than your current loan, and you may even be able to cash out some of your home’s equity.
Ideally, the refinancing process should result in you getting a loan that works better for you, whether because it saves you money on interest or it meets one of your other financial needs. With some VA loan refinancing programs— such as the Interest Rate Reduction Refinance Loan (IRRRL) — you’re even guaranteed to get a lower payment or, if you qualify, a fixed interest.
Reasons to Consider Refinancing
If you’re unhappy with the terms of your current loan, or if you want to tap into your home equity, refinancing could be a solution.
A VA refinance loan could help you replace your current loan with something that works better for you, and even help you walk away with cash.
Here are the main benefits you can get from refinancing:
- Get a lower interest rate: If interest rates have fallen, or if your credit has improved since you took out your current loan, you may be able to qualify for a better rate through a VA refinance, and lower interest rates can save you a lot of money in the long run.
- Reduce your monthly payment: Refinancing can reduce your monthly payments and make it easier to manage your budget. While lower payments can make it easier to stay current on your home loan, beware that they also tend to result in a longer repayment time frame, which means paying far more interest fees on your mortgage over time.
- Go from an adjustable rate to a fixed rate: An adjustable interest rate can be attractive up-front, since it’s usually lower than fixed rates, at least for the first few years of homeownership. But if your rate has increased, or you’d prefer the stability of a fixed-rate loan, a VA refinance can help get you into a fixed interest rate.
- Tap into home equity: If you have home equity — meaning your home is worth more than you owe on your mortgage — a VA Cash-Out Refinance loan could help you tap into your equity and turn it into cash.
VA Programs for Refinancing Your Home Loan
The VA offers two unique home loan refinance programs for borrowers. Depending on your eligibility, you may be able to improve your loan terms by using one of these programs. A VA refinance could help you get a lower monthly payment, cash out your home equity, or get a fixed interest rate. Here’s an overview of what the VA offers:
Interest Rate Reduction Refinance Loan (IRRRL)
This refinance loan can help qualified borrowers reduce their monthly mortgage payments, or it can help borrowers get into a fixed interest rate.
IRRRLs are sometimes referred to as “Streamline Refinance” loans because of how much easier they can be to apply for, and qualify for, than other home loans. The IRRRL, for example, requires very little paperwork, and no documentation of income — so no copies of your paycheck stubs, W2s or tax returns are required. Plus, it doesn’t require a home appraisal.
Here are the main features of the IRRRL:
- Only available for existing VA loans.
- Borrowers must pay VA funding fee of for additional refinances.
- Your current loan term can’t be extended by more than 10 years.
- The home must does not have to be your primary residence, but you must have previously lived there.
- The loan must result in a lower payment OR, if your current rate is adjustable, it must result in a fixed-rate loan.
- The borrower cannot cash out their home equity.
- Only available through private lenders (not directly through the VA).
Borrowers should be prepared to cover their closing costs, which average around $5,000 for a refinance, though you may be able to negotiate with your lender to reduce this expense. Just make sure that you calculate whether the savings outweighs the expense before taking on an IRRRL.
One option for borrowers who can’t pay their closing costs up-front is to roll them into their new loan. While this option may be convenient, beware that it costs more money in the long-run, since you’ll be increasing your loan balance and adding more interest fees and finance charges to your loan. Plus, it can cause you to go underwater on your home, meaning you owe more than the home is worth.
Cash-Out Refinance Loan
The Cash-Out Refinance gives borrowers an opportunity to convert the equity in their home to cash. This program can be helpful for someone who needs money for personal expenses or emergencies, like making a home improvement or paying for a medical procedure.
The downside to using a cash-out refinance is that you’ll increase your debt, since your new loan will cover not just your current balance but also the amount you cash out. Another way to look at it is that you’ll be turning your home equity into debt.
Unlike the IRRRL, borrowers must provide proof of income and undergo a property appraisal to qualify for a Cash-Out Refinance through the VA.
These are the main requirements to qualify for a cash-out refinance through the VA:
- Must have enough VA entitlement for the loan.
- The home must be your primary residence after closing.
- You must meet credit and income requirements.
- Must pay VA funding fee of for additional refinance loans.
- Closing costs must be paid up-front.
To qualify, you’ll have to meet both the VA’s credit requirement and your lender’s credit requirement. The VA to qualify for this loan, but the lender will have its own requirements. Every lender is different, but many require scores of about 620 or higher to approve you for a refinance.
Conventional to VA Refinance
You can use a conventional loan to refinance a VA loan. With this option, you’ll go through a lender who is not backed by the VA.
One of the main reasons borrowers may go this route is so they can use a new VA loan to purchase a primary residence in the future. Conventional financing is also useful for avoiding the VA funding fee.
A downside to conventional refinancing is that you may have to pay private mortgage insurance (PMI). This is often required if your down payment is less than 20%, though it can typically be dismissed once you’ve gained roughly 20% equity in your home.
Here are some of the main requirements to refinance to a conventional loan:
- Must provide documentation income and demonstrate affordability.
- Your overall debt cannot exceed the lender’s allowable limit.
- Credit score must be at least 620 for most lenders, with no recent bankruptcies, collections or missed debt payments.
Eligibility for Refinancing with the VA
The process of refinancing a home loan can be similar to taking out the original loan. The VA does, however, have unique requirements.
Here are some of the qualifications you’ll have to meet to refinance a VA loan:
- You served on active duty for more than 90 consecutive days during wartime or more than 181 days during peacetime.
- For National Guard members and Reservists, the veteran must have served at least six years.
- Some surviving spouses of veterans who died while in service or from a service-connected disability may also be eligible.
- For a VA Streamline refinance, you must already hold an existing VA Loan.
In addition to VA requirements, your lender may also have a unique list of qualifications you need to meet, including employment history, the amount of equity you have in your home and your credit rating.
Next Steps for Your VA Refinance
It can take some time and preparation to find the best refinance loan for you. Before applying for a refinance, be sure to start by reviewing the condition of your credit and making any necessary improvements.
Keep in mind: The better your credit is, the more refinance offers you’ll be approved for and the better your interest rate will be.
If you need help improving your scores, navigating the refinancing process, or even finding other forms of financial relief beyond a home refinance, a certified credit counselor can guide you through the process.
You’ll also need to find a lender who works with VA-backed loans. This could include a credit union, bank, or even an online lender. Be sure to shop around and get multiple rate quotes, since each lender may have unique requirements and fees, and one could offer you much better terms than another.
About The Author
Craig Richardson is a military veteran who started his journalism career while serving in the Navy. Following overseas deployments to the Med and Middle East, including service in Operation Desert Storm, he left for the private sector but continued with journalism. He has worked for several publishers and news organizations over nearly 30 years and continued to cover stories with ties to veterans and military affairs throughout his career.
- N.A. (2022, March 16) VA funding fee and loan closing costs. Retrieved from https://www.va.gov/housing-assistance/home-loans/funding-fee-and-closing-costs/
- N.A. (2021, September) VA Guaranteed Loan. Retrieved from https://www.benefits.va.gov/BENEFITS/factsheets/homeloans/VA_Guaranteed_Home_Loans.pdf