VA Loan Refinance Options You Should Know
The VA refinance loan option allows eligible veterans, active-duty military personnel, and surviving spouses to apply for a loan to refinance using an existing VA mortgage loan as the basic qualification for the refi, or to permit VA borrowers to tap into the equity they’ve built in their homes. There are 2 primary types of VA refinance loans:
- Interest Rate Reduction Refinance Loan (IRRRL): VA IRRRL loans, also called VA Streamline Refinances, were designed to help veterans secure a lower interest rate, or provide another tangible benefit. Depending on circumstances, those benefits can include lower mortgage payments, a fixed interest rate, or a lower interest rate.
- VA Interest Rate Reduction Refinance Loans, also known as VA Streamline Refinance Loans, typically require less paperwork and do not require a VA-required appraisal.
Key Benefits of VA Refinances
- Lower Interest Rates: The most common reason to refinance is to secure a lower interest rate, which translates to lower monthly payments and potential savings.
- Shorter Loan Term: Refinancing can be an opportunity to shorten your loan term. This helps you pay off your mortgage sooner and save money on interest.
- Get Out of an Adjustable Rate Loan to a Fixed-Rate mortgage: Refinancing to a Fixed-Rate mortgage adds predictability to your payments if you have an adjustable-rate mortgage.
- Cash-Out for Financial Goals: The cash-out option allows you to use that cash for any purpose acceptable to the lender.
- Streamlined Process for IRRRLs: IRRRLs are known for their simplified application process, often requiring minimal documentation.
Who Is Eligible for a VA Refinance?
- Current VA Loan Holders: You can refinance an existing VA loan or a non-VA mortgage (with cash-out refinancing.)
- Occupancy Requirement: The home being refinanced must be your primary residence.
- Creditworthiness: While there are no minimum credit score requirements for VA loans, lenders will typically have their standards.
- Loan History: A good payment history on your current VA loan is generally required.
Read next: Military Money 101
When Is the Right Time to Refinance?
The ideal time to refinance depends on your financial goals and market conditions. Here are some scenarios to consider:
- Lower Interest Rates: If interest rates fell after you closed your original laon, refinancing could save you money.
- Need for Cash: Do you need money to pay for home improvements or other expenses, a cash-out refinance could be a viable option.
- Financial Stability: If your financial situation or FICO scores have improved over time, your loan approval potential may be higher.
How to Apply for a VA Refinance
- Check Your Eligibility: Make sure you meet the VA and lender requirements for the VA refi option you’re interested in.
- Research Lenders: Compare rates from different lenders. Shop around to find the best deal.
- Gather Documentation: Collect your documents, such as your current loan information, tax documents, pay stubs and other income verification, asset statements.
- Get Your VA Certificate of Eligibility (COE): This is proof of your eligibility for a VA loan.
- Complete the Application: Work with your chosen lender to complete the loan application.
VA Interest Rate Reduction Refinance
The VA Interest Rate Reduction Refinance Loan (IRRRL), also known as the VA Streamline Refinance, is a valuable tool for veterans and active-duty military members who want to lower their interest rate and potentially save money on their existing VA loan.
Key Features of the VA IRRRL
- Purpose: To reduce the interest rate on an existing VA loan or transition from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage. It does not provide cash back to the borrower.
- Streamlined process: Generally requires less documentation and underwriting than a Cash-Out Refinance.
- No appraisal: There is no VA-required appraisal for IRRRLs.
- Credit requirements: While credit standards are generally more relaxed than conventional loans, meeting the lender’s criteria is still necessary.
- When mortgage rates are higher than they were at the time of the original mortgage, this option may not be a good choice unless you need to get out of an adjustable-rate mortgage.
Choosing the Right Option: IRRRL or Cash-Out?
Deciding between an IRRRL and a Cash-Out Refinance depends on individual financial goals and circumstances. If the primary objective is to secure a lower interest rate? Or to get out of an ARM loan into to a VA fixed-rate loan? The VA IRRRL might be the more suitable choice.
However, if accessing home equity for other purposes is a priority, the Cash-Out Refinance could be a better fit. There is no cash back with an IRRRL.
Read next: Military Money 101
Eligibility for VA Cash-Out Refinance
To qualify for this loan, several requirements must be met. There are FICO score requirements from the lender, the house must be your primary residence, and you must qualify for a VA mortgage with military service or uniformed service.
- Occupancy: The property must be a primary residence.
- Home equity: The property needs to have enough equity to cover the new loan amount.
- Creditworthiness: Borrowers must meet the lender’s standards for credit history and income.
- Certificate of Eligibility (COE): A valid COE is required, obtainable through the VA eBenefits portal or a lender.
- Refinance an existing loan: While having an existing VA loan isn’t mandatory, any previous mortgage (VA, conventional, or other) can be refinanced.
Advantages of VA Cash-Out Refinance
- Cash access: Tap into home equity for financial flexibility and various goals.
- Competitive rates: VA loans often have lower interest rates than conventional loans.
- No PMI: Unlike conventional loans, VA loans don’t require private mortgage insurance.
- Limited Closing Costs: Some approved closing costs can be rolled into the new loan.
- Flexibility: Cash proceeds can be used for a wide range of purposes.
Applying for a VA Cash-Out Refinance
The application process for a VA cash-out refinance loan involves the following steps:
- Lender Consultation: Discuss refinancing goals and eligibility with a VA-approved lender.
- Application Completion: The lender will guide the borrower through the application, collecting necessary information and documents.
- Appraisal and Underwriting: The lender will order an appraisal to determine the property’s value and the borrower’s financial situation.
- Loan Approval: If requirements are met, the loan will be approved.
- Closing: Finalize the refinance, close the new loan, and receive the cash.
Optimizing the VA Cash-Out Refinance
To get the most out of a VA Cash-Out loan:
- Calculate Equity: Determine available equity for potential cash-out.
- Compare Rates: Research and compare interest rates from multiple lenders.
- Use Cash Wisely: Plan how to allocate the funds for maximum benefit.
- Consider Debt Consolidation: Consolidating high-interest debt could lead to savings.
- Budget for Costs: Factor in closing costs when determining the loan amount.
Read next: Military Money 101
About the author
Editor-in-Chief Joe Wallace is a 13-year veteran of the United States Air Force and a former reporter/editor for Air Force Television News and the Pentagon Channel. His freelance work includes contract work for Motorola, VALoans.com, and Credit Karma. He is co-founder of Dim Art House in Springfield, Illinois, and spends his non-writing time as an abstract painter, independent publisher, and occasional filmmaker.
