Refinancing For Veterans

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(Updated December 2014)

Not only are there advantages for first-time homebuyers who apply for Veteran's Administration (VA) guaranteed loans, there are benefits for veterans and other qualified individuals who refinance their current mortgages. Even if you don't currently have a VA home loan, you can still take advantage of the program to refinance a non-VA mortgage, if you qualify. A VA refinance loan can save you lots of money over your mortgage term.

Types of VA refinance home loans

There are two types of VA mortgage refinance loans. The first is the Interest Rate Reduction Refinancing Loan (IRRL), also called a VA Streamline Refinance. It's the simpler and most straightforward of the two and can be used to lower your interest rate, convert an ARM to a fixed-rate mortgage or to pay off your mortgage more quickly by refinancing into a shorter term loan.

The second type is the VA cash-out refinance. This is for homeowners who wish to borrow against their home equity using a VA loan. It's also an option for VA-eligible borrowers who wish to refinance a non-VA loan into a VA mortgage. The requirements and procedures are similar to those on a VA loan for a home purchase.

Streamline Refinance

If you currently have a VA loan and want a lower rate, you need a streamline refinance/ Interest Rate Reduction Refinancing Loan. There's no VA requirement for an appraisal, income or employment verification, or credit report. (though some lenders may require one or more of these as part of their own guidelines) The main requirement is that you be paid up on your current VA mortgage and that you have made all your payments on time for the past 12 months.

The VA charges a funding fee of 0.5 percent of the loan amount on IRRRLs, which is considerably lower than for a purchase loan or cash-out refinance. Your lender will have its own origination fees and there will be other closing costs as well.

If you wish, you can have all your closing costs rolled into an IRRRL, so you'll have no out-of-pocket costs. Your lender may also be willing to waive some or all of the fees in exchange for a higher interest rate.

There is a limited cash-out option with a VA Streamline Refinance, which allows you to take up to $6,000 to pay for energy efficiency improvements to your home. However, those improvements must have done prior to closing the loan, within the previous 90 days, and the funds can only be for reimbursing those costs.

One potential complicating factor would be if you have a home equity loan or other second mortgage on the property in addition to your current VA loan. In that event, the lender holding your second mortgage would have to agree to resubordinate it to the new VA loan in order for the Streamline Refinance to be approved; that is, the VA refinance must be your primary mortgage.

Cash-out refinance

If you wish to borrow against your home equity, a second option is a VA cash-out refinance. You can borrow up to 100 percent of your home's value, less the balance owed on your current mortgage, without even having to pay for mortgage insurance.

This is also the option you would use to refinance a non-VA mortgage into a VA home loan.

The VA loan limits are the same as the ones the Federal Housing Finance Agency (FHFA) sets for Fannie Mae and Freddie Mac. That is, the VA will allow qualified individuals to borrow up to those limits without a down payment or having to pay mortgage insurance. In most of the United State, that limit is $417,000, but it goes as high as $625,500 in counties with high-priced real estate markets.

So if you have a $300,000 home and owe $200,000 on your VA mortgage, you can only borrow up to $100,000 in a VA cash-out refinance. However, if you owe $300,000 on a $500,000 home in a county with a $417,000 loan limit, you would only be able to borrow up to $117,000 in a cash-out refinance.

The VA charges a funding fee of 2.1 percent for regular military veterans and service personnel on their first cash-out refinance, and 2.4 percent for those from the Reserves or National Guard (same as on purchase loans). On subsequent cash-out refinances, the fee is 3.3 percent. These fees are waived for veterans with service-related disabilities and the survivors of veterans who died in service.

A cash-out refinance is the only way to borrow against your home equity using a VA loan; the VA does not guarantee home equity loans or lines of credit. However, if you don't wish to refinance your entire VA loan, you can still do a conventional home equity loan or home equity line of credit (HELOC) through any lender offering them. Having a VA mortgage doesn't prevent you from going elsewhere for a home equity loan; those loans simply won't be backed by the VA.

Eligibility

It's worth noting that the VA doesn't make loans itself, but only guarantees loans made by private lenders to eligible veterans and others. The interest rates and fees charged by those lenders may vary, so it's a good idea to shop around for the best deal.

If you served during wartime for at least 90 consecutive days, or during peacetime for at least 181 consecutive days, you're eligible for this loan. Active duty personnel are eligible after 90 days of active service. Reservists are also eligible, provided you've served for at least six years. These can be non-consecutive years, and from any branch of the Reserves.

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