If you have a VA loan, you have the right to take advantage of the VA streamline refinance. This gives you the chance to get a lower rate on your mortgage with very little verification and few costs. But, just because you are entitled to it, does it mean it is worth it?
Check today’s VA loan rates.
Before you jump ahead and take
the lower rate that seems like such a good deal, you need to determine your break-even point. This point is when you pay off the closing costs with the monthly savings. It’s only then that you start realizing the true savings of refinancing.
If you won’t pay the closing costs off in a short enough period, it often doesn’t make sense to do so.
Calculating the Break-Even Point
It’s imperative that you determine your break-even point before you refinance. It’s not as daunting as it sounds.
Start by totaling up the
costs to refinance. Don’t forget the funding fee, which this time around will cost you 0.5% of your loan amount. Next, you’ll need the monthly savings the new loan will provide. If your payment will decrease $100, then your savings is $100.
Find out if you are eligible for a VA loan.
The last step is to divide the total closing costs by the monthly savings. For example, if your closing costs are $4,000 and you save $75 per month it would look like this:
$4,000/$75 = 53.3 months or 54 months
After paying the new mortgage for 54 months or 4 years and 6 months, you will start seeing the savings.
Gauging the Break-Even Point
Now that you have a
break-even point, it’s time to determine if it makes sense. In the above example, you would need to be in the home for at least 4 ½ years before you would start seeing savings. If you know you are on the short-term plan and will move in the next 5 years, it’s safe to say that it doesn’t make sense.
On the other hand, if you have no intention of moving in the near future, it may make sense because you’d have the remaining 25 ½ years to enjoy the savings of the lower payment (assuming you took a 30-year term).
Assessing the Total Costs
Another good place to focus on the benefit of the streamline refinance is the total cost of the loan. Look at the APR and the total closing costs plus interest you’ll pay over the loan’s term. Will you save money in the end with the lower interest rate? Is the APR lower? These are two good indications that refinancing might make sense assuming you plan to stay in the home.
You’ll need to do a little work to make sure that the VA streamline loan is worth it. We know it can be tempting to jump on board when you don’t need to verify very much and you can get a lower rate. Just remember that refinancing always costs money, whether in interest or closing costs. Make sure those costs are worth it before you move forward.
Click to begin the VA loan refinance process.