Understanding VA Loan Refinancing Options

The VA loan program helps veterans buy and refinance homes with more favorable loan terms than those found in the open mortgage marketplace. If you are a veteran with a mortgage on a home that's your primary residence or that you previously occupied, and you want to refinance, a VA refinance may be the best option.

Why go with a VA refinance? A VA refinance offers significant advantages. Because the VA's insurance guaranty essentially sets up a financial safety net for the VA lender, a lender can pass more advantageous loan terms along to you, the veteran. If you've financed a home purchase with a VA loan before, you probably already know about some of these advantages. You receive the same benefits in a VA refinance, including limits on closing costs, no prepayment penalty and no private mortgage insurance requirement even if your down payment is less than 20 percent.

Your three options for refinancing a VA loan are:

• VA Streamline IRRRL
  Takes minimal time and expense

• Conventional VA Refinance
  Gives you more choices - cash-out or rate-and-term options - but it takes more time and costs more when compared with a VA Streamline IRRRL

• Non-VA Loan
  Rarely the best option because of comparatively higher costs and more strict underwriting requirements

You can refinance your primary residence using the VA's Cash-Out and Rate & Term Refinance for two purposes: to cash out equity from your primary residence or to change your mortgage interest rate, term or both. If your current mortgage is a non-VA loan and you want to refinance through the VA loan program, the Cash-out and Rate & Term Refinance is your only option.

You can use the cash-out of your home's equity for many purposes: pay off credit cards, fund tuition expenses, make improvements or conduct repairs to your house. The application process for this type of refinance entails a longer, more involved process than that of a conventional application or the VA's Streamline Interest Rate Reduction Refinance Loan (IRRRL).

The VA Cash-out and Rate & Term refinance can help you address personal financial dilemmas that other VA refinance types cannot solve.

Here are some advantages of a VA Cash-out and Rate & Term refinance:

• Allows for financing up to 90 percent of your home's appraised value
• May guarantee loans up to 100 percent of your home's value, provided the guaranteed amount does not exceed your VA loan entitlement
• Allows you to take equity out of your home to pay bills, fund tuition costs, buy that much-needed car or simply to travel
• Allows you to shorten the repayment period of your loan or maybe even reduce your monthly payment
• Allows you to pay for repairs or energy efficient improvements, or to remodel an outdated home

If you financed your home purchase with a VA loan and you want to refinance to another mortgage, the VA Streamline Interest Rate Reduction Refinance Loan (IRRRL) might be the right choice for you. Perhaps one of the biggest benefits of a VA IRRRL mortgage is its reduced cost. As its name suggests, a Streamline IRRRL is a suitable way to refinance to a lower interest rate than the one you currently pay.

To refinance through a VA IRRRL, your new monthly mortgage payment must be less than your current monthly payment. The VA allows you to circumvent this rule if any of these conditions apply:

• Your new mortgage is a fixed rate and your current loan is an adjustable rate mortgage
• Your new mortgage loan term is shorter than your current loan term
• Energy efficiency improvements are planned as part of a cash-out refinance

The VA IRRRL mortgage is a smart option because the refinance process is a rather seamless experience. A VA IRRRL refinance not only uses your original entitlement, but it also authorizes lenders to close IRRRL loans as a matter of routine. Also, a VA IRRRL refinance almost always lowers your interest rate, which provides a great way to reduce your monthly outlay with little effort.

The true advantage of the VA IRRRL lies in its simplicity and reduced expenses. You won't need to obtain an updated or new Certificate of Eligibility (COE), and you can expect a significantly shorter loan processing time compared with other VA options.

Here are some additional advantages of a VA IRRRL:

• No appraisal required
• No credit underwriting package required, which means little documentation
• Option of "no money out of pocket," because you can add refinance costs to your loan amount
• Flexibility to choose any VA approved lender
• No current occupancy requirement, except for your certification that you previously occupied the home

Although many veterans choose to lower their interest rate using a VA Streamline IRRRL refinance, lenders also offer this refinance as a way to reduce the term of your loan, from 30 to 15 years. Choosing to reduce the term of your loan by one-half can save you a lot of money over the years. If you choose this route, be aware that this can increase your monthly payment. Check out our calculator to see how much you might save by refinancing to today's rates. The example below gives you an idea of how much a homeowner would save by refinancing a 30-year, $240,000 loan.

The table below shows a couple of examples of how much a homeowner would save over the years by refinancing into a shorter term loan, with a lower interest rate and slightly higher monthly mortgage payments.

Should your property have additional mortgages or liens (other than the current mortgage you want to refinance), the holders of these additional mortgages must agree to remain in a subordinate position to your new mortgage. Before or at your refinance closing, you, with your VA lender's assistance, will need to obtain additional documentation to ensure your new VA mortgage's priority over these existing liens.

One in every 10 home loans is a VA loan

Source: Ellie Mae, data from April 2015, VA

Before you proceed with an IRRRL refinance, you should consider a few caveats. A Streamline IRRRL refinance does not permit cash-outs, unlike the VA's Cash-out and Rate & Term refinance. The primary goal of a VA IRRRL is to help you cut your interest rate. However, there is an exception if you are requesting cash-out to reimburse you for expenses related to the cost of energy efficiency improvements.

If your monthly payment increases by more than 20 percent, the lender must include a certification that you qualify for the new payment.

Contacting several VA approved lenders to shop around for the right lender to bring you through your refinance is a wise step because closing costs and terms can and do vary. Steer clear of a lender claiming to have exclusivity regarding Streamline IRRRL refinances or claiming to be the "official" VA IRRRL lender. The reality is that any VA lender can help you with an IRRRL.