Last Updated on February 8, 2023 by Bob Filipczak
The VA refinance loan comes in two varieties, and each one has distinct advantages. They are each designed for active-duty service members and veterans, and they meet very different needs. If you have been in your home for awhile and want to improve your financial circumstances, VA refinancing may be a very good option. If you thought the VA Loan Program was just about purchasing homes, think again.
There are two primary reasons to pursue VA refinancing for your mortgage:
- You want to reduce the interest rate on your current VA loan, thereby reducing your monthly mortgage payments and your overall obligation over the life of the loan.
- You want to cash-out some of the equity in your home, giving you money for repairs, renovations, energy efficiencies, education or emergencies.
Of course, there are a lot of moving parts to both of these mortgage refinance options, but the benefits are certainly worth further investigation.
Here’s a summary of the two refinancing options and how they work.
The VA IRRRL: Veterans Mortgage Refinancing Part One
The VA Interest Rate Reduction Refinance Loan, or VA IRRRL, is a program that helps military professionals and veterans refinance their mortgages. Interest rates on mortgages can move around in the real estate world, because interest rates change based on the decisions made by the Federal Reserve bank. When interest rates move, refinancing may be an option that makes sense.
While having a regular VA Loan is a very good deal, the VA IRRRL is a way to make it even better. It is a loan that replaces your current mortgage with another VA-insured mortgage, but this one has a lower interest rate. It keeps you as part of the VA Loan program, but having a lower interest rate has short-term and long-term benefits.
The short-term result is you have a mortgage with a lower interest rate will reduce your monthly mortgage payment, and that can affect your budget right away. The long-term result of lower interest rate is you owe the mortgage lender less interest over the course of loans–usually tens of thousands of dollars.
If the current interest rates are not attractive for a refinancing, you can also refinance as a way to change the terms of your loan. If, for example, you want to switch from a 30-year mortgage to a 15-year mortgage, a refinance can do that for you. In this case, your monthly payment probably won’t go down (and may go up) but you will be paying less, for fewer years, on your loan.
It’s important to remember that the IRRRL VA loan is only available to the current VA Loan holders. If you haven’t gone through their process and been approved for (and received) a VA Loan, this refinance option isn’t available to you. If you do have a VA Loan, this may be the next logical step for you.
The VA Cash Out Refinance Loan: Veterans Mortgage Refinancing Part One
This is a way to tap into the equity of your home and get money based on your home’s equity. You essentially create a new mortgage for your home, often with similar interest rates, and turn your equity into cash that you can use. If, for example, you have paid down about $50,000 of your mortgage over time, you can turn some of that equity into a payment to you (minus closing costs).
Likewise, If the equity of your home has gone up, i.e. your home’s current value is $250,000 instead of $200,000, that extra equity from the increase in the value of your house can also increase the amount you can cash-out. As always, work with a professional mortgage specialist when figuring out exactly how much equity you have and how much cash you can get.
The VA Cash Out Refinance Loan means that your mortgage refinancing will be guaranteed and insured by The Department of Veterans Affairs. For the private lender that actually issues the mortgage, it means they take less risk and have more confidence in the loan they are giving you. Unlike the VA IRRRL program, however, your original mortgage does not need to be a current VA loan. That’s a big deal.
As long as you qualify for the VA Cash-Out loan by being an active duty military service member or a veteran, you can use this program. This ability to switch from a non-VA loan to a VA loan has many benefits to you, the borrower.
Are you eligible? VA Refinance Guidelines
The primary requirement to be eligible for either of these refinance options is getting the Certificate of Eligibility–the document that certifies that you qualify for VA Loan benefits. If you’ve already got a VA Loan, you’ve already done that. If not, it’s a vital part of this process.
With the VA IRRRL, you need to certify that you have lived in the home–maybe not currently but it had to be your primary residence some time in the past. With the VA Cash Out Refinance, you need to be currently living in the home you are refinancing.
In terms of credit scores, proof of income, debt-to-income ratios, etc., most of those requirements will be governed by the actual mortgage lender. While the U.S. Department of Veterans Affairs guarantees these refinance loans, the money and loan agreement will come from a private mortgage broker or bank. These private lenders may have minimum requirements on things like credit scores.
On that note, Homes for Heroes can help you connect with a lender, which is one of the first steps in the refinancing process. Our network of lenders want to help community heroes in all stages of the home buying and ownership journey–buying, selling and refinancing.
Pros and Cons of both VA Home Loan Refinance options
The VA IRRRL and the VA Cash Out Refinance loan are very different in most respects–from eligibility to results. That’s why it’s important to know the pros and cons when you are making a decision. Some of these could be strong reasons to go forward while others may be deal breakers.
Just remember that both of these VA home refinance options will involve closing costs at the end of the process. Find out what they are as early as possible so you don’t get surprised.
- Streamlined – Also known as “VA streamline refinance”, these loans involved minimum paperwork, no appraisal, minimal credit check.
- Fast – because they involve so little paperwork (by real estate standards) these refinancing loans can be completed in 30 days.
- Already have VA Loan – Your current mortgage must be insured by the VA loan program to qualify for the IRRRL.
- No cash back – You cannot use this refinance for a cash out. The one exception is if you are using the money to make energy efficient changes to your home.
- VA funding fee – All VA loans involve a funding fee, usually ranging between 2.3% to 3.6% of the loan’s value. In the IRRRL, the fee is quite low: 0.5%
VA Cash Out Refinance
- Cash – Probably the most attractive part of a cash-out refinance is the “cash” part. Being able to convert your equity into cash to make improvements in your house, do repairs, pursue more education or take care of emergencies is a huge benefit.
- 100% – Due to recent changes in the VA Cash Out Refi program, you can now borrow against the full value of your home’s equity. There are no upper limits and you can get 100% of your home’s equity. In the past the VA had a maximum cap on how much you could cash out. While the VA has loosened its limits, your private lender may have lower allowances, so consult with them.
- Non-VA loans – If you qualify for a VA loan but didn’t get one for your home, this is your chance to convert your conventional loan into a full VA loan and get some cash at the same time. The benefits of converting to a VA loan are too many to list here, but they include: no down payment, no private mortgage insurance, low interest rates, etc.
- Full Closing Process – Unlike the IRRRL process, this refinance is the full deal. All the fees you would normally have during closing apply to this VA refinance loan. You will probably be paying: origination fees, appraisal fees, credit report fees, lender’s title insurance fees, and discount points (when applicable).
- VA Funding Fee Refinance – All VA loans include a funding fee and for the cash out refinance, it’s 2.3% of the loan amount for a new VA loan (or 3.6% if this isn’t your first VA loan).
- Stricter requirements – Since this is just like a normal closing, the process includes all the hoops you need to jump through for a normal mortgage. That means private loan officers will be doing credit reports, calculating debt-to-income ratios, verifying your employment and more.
Three Steps to a VA Refinance Loan
- Find a private lender – Having a private lender is essential to both versions of the VA Refinance Loan. Homes for Heroes looks for, and signs up, mortgage lenders that want to help and thank military service members and eligible veterans. In that way, we can connect you with private lenders who understand the ins and outs of refinancing as well as the VA loan Refi processes. Getting the right lender is key to your VA refinance; let us help you find the best mortgage specialist for you and your needs.
- Get pre-approved – Once you’ve determined which lender you will be going with, work with them to get pre-approved for the refinance.
- Gather documentation – The refinancing process is purely a matter of working through the paperwork and loan documents, so have all your files together. Make sure your Certificate of Eligibility is filed and completed. Your lender should be able to provide a checklist of what you will need to make sure the closing is smooth.
Refinancing your mortgage, either to reduce your interest rates, to reduce the duration of the loan or to get much needed cash for your life is a smart move when the circumstances are right. We at Homes for Heroes want to help. We have a network of mortgage specialists and brokers that are well-versed in the VA Loan programs and the options available. Let us help you every step of the way.