Two great mortgage refinance options to consider
Even as the COVID-19 pandemic continues into the summer, the housing market remains active. Low interest rates have prompted people to buy new homes or refinance their existing loans.
It’s important to make note of two loans provided by the US Department of Veterans Affairs — VA Interest Rate Reduction Refinance Loan and a cashout VA loan. Either refinance is available to veterans or active-duty military.
A refinance through either program could save hundreds of dollars a month on your mortgage.
Before we explore both options, let me explain
“refinance” in general. With a refinance, you change the terms of your mortgage. For example, you may pay a new monthly amount for your principal and interest payments.
VA Interest Rate Reduction Refinance Loan (VA IRRRL)
VA IRRRLs must pay off a VA loan that meets all of the following requirements.
To obtain an IRRRL, you may not need an appraisal. You may refinance the loan with “no money out of pocket” by including all costs in the new loan. You could also take out the new loan at an interest rate high enough for the lender to pay the costs. However, you cannot receive any cash from the loan proceeds.
The loan must be current, meaning it can’t be more than one time 30 days past due during the six months preceding the new loan’s closing date. The IRRRL loan must close seven months after the closing on your original loan, and you must have made six full monthly payments on the original loan.
Your lender will need to do a bit of math up front before the refinance can take place. Let’s say you spend $4,000 on closing costs to refinance with the IRRRL program. You will need to demonstrate you can save up to $4,000 in monthly payments over the next 36 months.
Why? The bank and the VA need to know you will benefit from the refinance and see savings in a short time period.
During an IRRRL refinance, you can also change from an adjustable rate mortgage to a fixed rate so even if interest rates shift over time, yours will remain the same.
A home that is financed with a VA loan but is no longer your primary residence can still qualify as long as the veteran or the spouse of an active service member can certify he or she previously occupied the property as his or her home. This is different than the requirement for nonIRRRL VA loans that the veteran must intend to occupy the property as his or her home.
Cash-out VA loan
If you own a home and carry debt in several common ways (student loans, credit cards, medical expenses, etc.), then you may want to consider a cash-out VA refinance.
That’s because the program can help you pay off debt by using the equity you have gained in the property. Let’s say you have a loan balance of $180,000, and your house is valued at $300,000. That means you have 40 percent equity in the home ($120,000).
Depending on the investor, you may be able to take up 90% to 100% of the equity to use at your discretion. The total (e.g.: $180,000 loan balance plus amount taken out of the equity) then becomes a new loan with revised terms.
A cash-out refinance isn’t just for paying off debt. You can also take advantage of the option to remodel your house, pay for a child’s tuition, fund a wedding or address some other need.
The program is appealing because it allows homeowners to consolidate debt as part of a mortgage, which stretches the monthly payments — like for a credit card — across a long timeline like a 30-year mortgage.
Unlike the IRRRL loan, cash-out option is for a primary residence only.
Take advantage of either refinance option now and see if you can reduce your monthly mortgage payment.
With a refinance, you change the terms of your mortgage. For example, you may pay a new monthly amount for your principal and interest payments.
Shikma Rubin is a loan officer at Tidewater Home Funding in Chesapeake. Have mortgage questions? You can reach her at srubin@tidewaterhome funding.com or 757-490-4726.